Over the last few years, HMRC has taken a keen interest in individuals
which claim to be self-employed contractors, freelancers and more recently those
that provide services through managed service companies and personal service
companies. The reason for this is
because services provided to organisations in this way obtain a tax benefit and
employers avoid paying employer National Insurance contributions (NIC). This has in some cases, resulted in an abuse
of this kind of arrangement.
HMRC is now considering making employers responsible for
contractors’ tax bills in order to clampdown on ‘fake employees’. The move follows George Osborne’s pledge to
crackdown on these arrangements in the July 2015 Budget and the subsequent
consultation paper from the Government. The Government is concerned with the
body of evidence which suggests that there is significant non-compliance and
breach of the IR35 avoidance rule.
Many of you will be aware that IR35 was introduced to enable
HMRC to catch anyone whose sole intention of setting up an intermediary company
was to avoid liability for income tax and NIC. The legislation allows HMRC to
look behind the legal relationship and determine how the worker should be
The Budget contained the following additional measures to
IR35 that will further restrict the tax avoidance practice:
· NIC allowance will no longer be available to
companies whose sole employee is the shareholder/director from 2016-17.
· The tax credit on dividends was abolished with
effect from 6 April 2015. In addition, after
the first £5,000 of dividends which will be exempt, dividends will be taxable
at the rates of 7.5%, 32.5% and 38.1% for basic rate, higher rate and
additional rate taxpayers respectively.
· Travel expenses to and from any assignment where
the individual is subject to the right of direction, supervision or control
with be subject to tax and NIC (to be deducted by the agency that contracts
with the end client).
The consultation paper from the Government will also look at
the measures and how they can curb the practice. The consultation will run until the end of
September 2015 and you can view it here.
Whilst we do not know if or when any
further changes will come into force following the consultation period we will keep
you updated on this matter as and when we know more.