Taxman heading along an ill-advised route to implement IR35

What do we know so far about the new Conservative government and its tax arrangements? We know that:

  • Lord Leveson believed that HMRC are opting to chase small fry when there are bigger fish in the sea;
  • the government wants to crack down on tax avoidance by contractors operating through limited companies;
  • the government must cut significant numbers from its budget to meet its own expenditure targets.

In the latest IR35 discussion document, we see the result of those three conditions.

Rather than task HMRC with chasing potential IR35 cases, it’s putting the onus on clients to root out “disguised employees”.

Disadvantages of employing contractors will outweigh the benefits

As it stands, it’s advantageous for companies to employ contractors. They don’t have to worry about:

  • working out tax and NICs for the self-employed people they take on;
  • employing a full time worker (and the associated red tape) for a short term fix;
  • providing insurances or pension contributions, as most contractors and freelancers come with their own.

But the latest addendum to IR35 – asking clients to vet their contractors before engaging them – could override the benefits. This situation is compounded when you think that many contracts or assignments are awarded through an agency.

Yes, no doubt agencies will have a similar onus of responsibility. But if they’ve got a lucrative position to fill and the only candidate is in the grey area of IR35, are they going to turn down the offer to supply a candidate? Unlikely.

Self-employees already leaving the labour market in droves

Last week, we already saw that year-on-year, May 2015 posted a drop of 131,000 self-employed workers. With the changes planned for intermediaries under the supervision, direction and control directive plus a potential third degree with every new assignment, the problem of vetting contractors may sort itself out without the government having to give a fig.

Quite simply, it will not be worth a skilled specialist’s time and trouble to create a limited company.

Yes, the government may eradicate a few of the disguised employees it believes are costing the Exchequer £430M in lost income tax and National Insurance. But there are two (other) major concerns with this philosophy.

First, the flexibility that the temporary workforce brings the economy will petrify. And secondly, if someone genuinely believes they can get away with not paying their full dues, they will.

The government would be better advised to take an extra £430M every year and look to see how it can support the UK’s self-employed workforce. Instead, the corridors of power seem intent on closing every avenue that makes the route to success less taxing for those willing to gamble their future by striking out on their own.

With so many roadblocks, the economy will face dead end after dead end. Like goldfish, it will only grow to the size of its bowl. Starve it of oxygen completely and the recovery will be floating up top on its side in no time. That’s the scale of the changes afoot. Fin

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