Budget 2016: Experts weigh-in on leaks suggesting contractor clampdown

Accountants, law firms and contractor representatives speak out on the Chancellor's leaked tax plans for contractors

Experts have weighed in on leaked Budget proposals to clamp down on the use of personal-service firms by contractors - proposals that come just a year after a Budget that restricted tax relief for travel and subsistence costs for contractors.

"The leaked proposal will mean that public sector bodies, such as government departments and wholly public sector owned organisations (for example, Channel 4) must deduct PAYE and employer's National Insurance contributions where a contractor's representative is undertaking a defined role instead of providing a business to business service," said Martyn Valentine, an adviser at the Law Place, an IR35 employment consultancy that works in conjunction with Weaver Rose Solicitors.

He added: "While the precise details are as yet unknown, the responsibility for ascertaining a contractor's tax status may shift to the public sector body thereby creating unwanted uncertainty for a contractor."

However, at this stage it is uncertain whether the Chancellor, George Osborne, will try to target specific roles where abuses of contractor status and personal service companies are believed to have been particularly egregious, or will try to implement across the whole public sector - with the fear that they will be applied to the private sector too at some point in the near future.

"If the Chancellor adopts the latter approach IT contractors will be affected unless they can show that the engagement in question genuinely constitutes self-employment. That is to say, the work is entirely project based, there is no equivalent job within the public sector body, the individual does not hold a job title, the individual is not subject to or under a right of supervision, direction or control as to the method of undertaking the work and there is an enforceable right to substitute the individual," said Valentine.

As a result, contractors could find themselves tied up in bureaucracy. "Unfortunately, where recruiters and multi-disciplinary consultancies are involved in the recruitment process establishing self-employment can be a difficult process for IT contractors without legal representation due to the endemic practice of defining the services to be provided as a role," adds Valentine.

He continued: "The existing legal position is that a contractor cannot be self-employed if the work is defined by reference to a job title and this is likely to be aggressively applied by the Chancellor in the forthcoming Budget without amending the IR35 legislation."

The association of Independent Professionals and the Self Employed (IPSE) has branded rumoured changes as "short sighted", pointing out that Osborne had been appointed Chancellor in 2010 with a brief to cut bureaucracy. Making the public sector client decide the employment status of freelance workers, IPSE adds, will lead to confusion among workers and add costs for the taxpayer.

"Independent professionals in the public sector are not employees, and attempting to change their employment status will lead to confusion for the workers and added cost to the taxpayer," said IPSE chief executive Chris Bryce. "Once you label a freelance business owner an employee, he or she will expect holiday pay, sick leave and other employee benefits which will have to be paid for by the taxpayer."

[Page two: "The contractors who should be caught currently by the IR35 rules, but are ignoring them, will be the ones who are likely to suffer."]

Budget 2016: Experts weigh-in on leaks suggesting contractor clampdown

Accountants, law firms and contractor representatives speak out on the Chancellor's leaked tax plans for contractors

Furthermore, Bryce warned, contractors may shun the public sector if it is applied only there, reducing the skills available, not just for IT projects, but a range of activities delivered by government, such as engineering expertise for the Crossrail and HS2 rail projects. "This move is entirely against the Government's declarations that it supports entrepreneurs and is working to reduce red tape," added Bryce.

However, Luke Desmond, a partner at accountancy practice Crisp Accountancy, which handles many contractors' tax affairs, suggested that such reports of contractor tax clampdowns had surfaced before in previous Budgets, as well as last year's Autumn Statement.

"The Daily Mail published a similar article quoting a 'leaked government source' a few days before the last Autumn Statement, which signalled the 'end' of the PSC - which of course turned out to be rubbish," said Desmond.

Instead, Desmond believes that the Chancellor will more likely introduce an online tool from HMRC to help contractors more easily work out whether they will be caught in the IR35 dragnet - but admits that the Chancellor could go further. "The changes to IR35 are likely to be focused around an online test to help contractors decide whether they are caught by the IR35 rules or not, similar to the ESI tools for self-employed individuals.

"They could also introduce a transfer of debt provision which would hold all of those in the chain responsible - that is to say, recruiters and end clients as this is effectively what they did when they introduced the managed service company legislation. However this is purely speculation at this point.

"All of this is simply HMRC's way of ensuring the IR35 rules are correctly applied. Those contractors who are truly in business on their own account may have a small amount of extra admin to prove this but will fundamentally be able to carry on as before. The contractors who should be caught currently by the IR35 rules, but are ignoring them, will be the ones who are likely to suffer."

Desmond suggests that any proposed changes won't come into force before April 2017 and will most likely follow a formal consultation.

"The one legislation change that we do know is coming in to force next month is the changes to the way dividends are taxed, which will mean contractors operating via PSC will pay more tax on the dividends they receive," says Desmond, whose practice offers an online calculator to enable affected contractors to work out how badly (or not) they may be affected by this change.