The financial implications of extending IR35

The Telegraph newspaper has been busy investigating IR35 and the proposed extension of this into the private sector. Specifically they have looked at the financial implications of these changes and the findings do not make for pretty reading.

A number of industry experts and contractors were interviewed by the newspaper as part of their report following the recent landmark IR35 tax tribunal case against BBC presenter Christa Ackroyd. HMRC put the case forward that the defendant who used her own limited company, should be caught inside IR35 and should be taxed accordingly as an employee. The tribunal agreed and the result was a tax bill in excess of £400,000. 

The financial implications of extending IR35

 

The Telegraph has produced some eye watering calculations for the likely financial impact of being reclassified as inside IR35. Research from contractor tax advisors Qdos Contractor has be used as the basis for these findings. For example a contractor using their own limited company and earning £50,000 a year would experience a significant increase in their annual tax bill. The bill would increase from the self-employed level of £2000 to the employee level of £13,000. To make matters even worse the individual would receive none of the employment benefits that employee tax and national insurance cover. 

The report additionally looks at research conducted by the contracting advice website ContractorCalculator.  The research indicates that there is now a huge movement of self-employed professionals away from the public sector due to the new IR35 rules recently brought in. Worryingly the research concludes that up to a quarter of NHS nurse and doctor locum workers are turning their backs on the public sector. Many contractors are scared of being misclassified inside IR35 due to the huge financial implications of this.  It is therefore important for end clients to make well informed IR35 decisions on a case by case basis to mitigate these concerns.

ContractorCalculator CEO Dave Chaplin discussed further a recommendation from the Taylor Review to grant employment rights to self-employed workers if they are taxed as employees. “Curiously, Government doesn’t see fit to consider these recommendations in conjunction with the IR35 legislation. It needs to align its thinking soon. Otherwise, instances similar to Christa Ackroyd’s case will become increasingly commonplace.

In another extreme example quoted by the Telegraphy one contractor had undergone eight separate IR35 assessments, including using HMRC’s own online tool. Every one of the assessments had categorised her as falling outside IR35. However the NHS still deemed her an employee thereby massively increasing her tax bill and effectively halving her income.

Source: Telegraph (https://www.telegraph.co.uk) 17th February 2018 – How HMRC’s model now relies on getting other businesses to do its dirty work

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