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Will the forthcoming Budget tighten IR35 rules?

Article posted: 17th October 2018

Back in May we wrote about how HM Treasury and HMRC had opened a joint consultation on how the tax rules applying to off-payroll working – widely known as the IR35 tax rules – were being applied.

The consultation period closed in August and as yet there has been no formal announcement of the outcome. However, a recent BBC news article suggests the forthcoming Budget could include proposals that will significantly change how the rules should be applied.

It is already the case that public sector bodies who hire workers via personal service companies are required to determine whether those workers are in effect employees. Whilst this change has reportedly caused difficulty and resulted in public bodies suffering shortages of key skills, HMRC has estimated the move has raised £410m in extra taxes since 2016.

If the report proves accurate, the Chancellor’s Budget speech will see him announce a similar reform of the rules to be applied to private sector businesses. This will mean the onus will be on those who engage workers via personal service companies to satisfy themselves that the worker would be classed as self-employed if engaged directly. If not, the business will have to treat the worker as an employee and tax them accordingly, including a need a need to account for employer’s National Insurance Contributions.

This is a complex issue and while details are as yet unknown, the experience of how these reforms have impacted on the public sector suggest they would be likely to lead to confusion and uncertainty for both contractors and businesses alike.

What is certain is that the government would see this as a tax raising measure - according to the Treasury, non-compliance with the rules as they stand would cost £1.2 billion a year in unpaid taxes by 2023.

With the government under pressure to raise taxes to be able to meet its pledge of £20 billion worth of extra spending on the NHS by 2023, we will have to wait and see whether further reform of the IR35 rules will be one of the ways it chooses to help fund this spending.

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