Government Looks To Increase Tax Revenue from Contractors

In the UK government budget last week, there were announcements about the tax treatment of contingent workers, announcements that appear to add to confusion rather than clarifying an already complex situation around the legendary “IR35” legislation.

The government wants to remedy the situation whereby people are in effect working directly for an employer, but this employment is “disguised” as self-employment so that both parties (worker and employer) pay less in terms of taxes like National Insurance.

The last couple of years has seen something of a clampdown on this practice in the public sector – government bodies themselves have been big users of temporary staff, often employed through pretty dubious means. Indeed, we know people who worked for years on a day rate basis – the most extreme I found while working as a consultant was someone working for over 20 years for a particular government research body. When I tackled the CFO over why this person had been paid £600 a day or whatever it was for so long, he said “he didn’t want to be an employee and he has very specialist skills”!  I pointed out that however esoteric the knowledge, 20 years was probably enough time to have done a bit of skills transfer...

Anyway, new tests were introduced a couple of years back, and the responsibility was placed on public sector employers to check that the correct tax was being paid. This led to many staff being re-classified as employees, with greater tax liability for both parties. In some cases, organisations saw many contractors leaving as a result.

The new moves in the private sector, which follow a somewhat dodgy HMRC consultation that didn’t appear to take much notice of those who opposed the changes, include extending that responsibility to employers here as well. However, one of the new confusions arises because the government says that this will only apply to larger employers – “SMEs” such as firms with under 250 staff will be excluded.  The logic appears to be “not burdening smaller firms with administrative burdens”, but might we see new work-arounds where contractors work for smaller firms and are then sold on to larger?

The government hopes that this will be the biggest revenue-raising measure in the recent budget. But there is still considerable uncertainty, starting with the definition of a “personal service company”, the target of the legislation. It is not a legal term but is generally taken to mean a single contractor who is also the only director and shareholder of a limited company. But what if the partner (husband / wife) of the contractor is also a director? Or what if two or three contractors get together in one limited company?

However, it may be that the day of an IT contractor or project manager sitting in the same office for months or years on end, with a clear reporting line to management and everyone treating them as an employee, yet being treated more favourably from a tax point of view than the real employees, will be over soon. That is not a bad thing in our opinion. It may also drive firms to look more carefully at the whole interface between contractors, statement of works activity and consulting, which would be another positive.

Where a piece of work can be clearly defined in terms of outcomes and outputs, with the supplier determining the exact method of delivery, the time required and “labour substitutability” in place (the contractor determines who actually does the work), then both parties are probably in the clear. If the contractor works for multiple clients, provides the necessary equipment, doesn’t get sick pay or holiday pay… then again, these are indicators it is unlikely to be seen as “employment”.

This is one of the largest spend categories these days for many organisations, so it is important to keep on top of the changing legislation - more for contingent labour category managers to think about anyway.

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