Industry professionals estimate that the tax changes brought about by IR35 rules in the private sector could increase the tax of a self-employed contractor earning £100,000 a year by as much as £7,500.
Since April 2017, publicly-funded bodies have been responsible for determining whether freelancers are truly self-employed or an employee of the firm.
This used to be the contractor’s responsibility, but the Government changed this when it cracked down on so-called “disguised employment” under the IR35 rules. In July this year, the Government published the draft legislation for extending the IR35 rules to the private sector from April 2020.
The new rules mean that large and medium-sized businesses in the private sector may become liable for paying PAYE and National Insurance Contributions (NICs) for people who are working for them through a Personal Service Company (PSC). Small companies, as defined by the Companies Act, will be exempt from the new legislation.
From next April, any private sector client who comes under the new rules will be responsible for working out whether the individual’s contract falls inside or outside of IR35. This is to try to prevent the practice of ‘blanket rulings placing all contractors inside IR35.
In 2017, the Government estimated that the changes would affect around 170,000 contractors. However, recent research suggests that the number of people looking to go self-employed rose by 31 per cent last year, so this figure could be much higher.
Critics of the new rules claim that they will stifle innovation, with a spokesman for the Association of Independent Professionals and the Self-Employed (IPSE) saying that recent research shows “how crucial freelancers are for companies to create, innovate, improve productivity and compete on the global stage”.
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