Important Tax Rule Changes for Companies & Their Contractors

The self employed and independent contractors have traditionally been able to decide whether to operate through a personal service company, under which they receive dividends and an income from the company, with the latter paying corporation tax on its income minus allowable costs including any salary paid out. The purpose and objective of this so-called IR35 rule was essentially a lower rate tax advantage enjoyed by such personal service companies. Since 2017, companies in the public sector have been required to decide whether the IR35 rules apply to their contractors, and from April 2020, new rules will require all companies, apart from those with fewer than 50 employees or less than £10.2m annual turnover, to decide whether IR35 rules apply to their contractors.

The new HMRC rules will require all hiring companies to show they have taken reasonable care to assess the IR35 status of their contractors. If they fail, then they risk being liable for any shortfall in tax and national insurance. There is concern that employers will err on the side of caution, and risk making blanket decisions about contractors, rather than on an individual basis so as to minimise risk and cost.

In the light of this, businesses ideally should be auditing their contractor workforce now to understand the level of risk they may face, and whether they may be engaging disguised employees through personal service companies. Business groups are, however, imploring the government to be cautious about the timing of the introduction of the new rules, prior to the issue of government guidance, not to mention the complexity of the rules relating to status in the light of relevant principles evolving before the courts in a series of cases involving the gig economy.

Although such case-law focuses primarily on the question of status as worker under employment legislation, the principles relevant to such status are to a large degree relevant to the question of status as employee as opposed to being self employed. Although strictly the regime for establishing a person’s employment status is not quite the same as that which determines the person’s tax status, certain key tests are common to both, and include the existence of mutual obligations, autonomy and control, and the ability to send a substitute for the work.

The existence of two similar but distinct status tests (tax and employment) has resulted in calls from business groups to harmonise them to make it easier for companies to assess who are employees and who are contractors. This should also help to eliminate the risk of a contractor being deemed to be a contractor for tax purposes, but being declared an employee by an employment tribunal. Contractors can protect their independent status by having a number of different clients and assignments and it might be in their financial interest in certain cases to become an employee.

For further advice on this, or any aspect of Employment Law, please contact a member of our Employment Law team.

 – Keith Corkan