Matthew Taylor was commissioned by the UK Government to look at modern working practices and his report was published in July 2017. The recommendations could affect IR35.
IR35 tax legislation was introduced to combat the problem of ‘disguised employees’ – contractors who worked as employees through limited companies to avoid tax and NI contributions and benefit from dividends.
If you can prove you are not an employee you are deemed to be outside of IR35 and will get the tax benefits; if you cannot prove it (and there are IR35 tests) you will be inside IR35 and pay higher taxes (reducing income by as much as 25%).
Most people would agree that IR35 is not a perfect system. Part of the problem lies in the definition of an ‘employee’. This was something that Taylor wanted to clarify because the introduction of ‘gig economy’ workers had further blurred the lines between employees and self-employed staff.
The arrival of dependent contractors
Currently, there are 3 types of employment; employee, self-employed and worker. Taylor recommends re-classifying worker as ‘dependent contractor’ to provide clearer boundaries between the three groups.
Taylor recommends aligning tax law and employment status law more closely. So, an employee under one form of legislation would become an employee under another. As a result, IR35 would become redundant.
However, some have argued that having three different categories of workers (employed, dependent contractor and self-employed) for employment law but just two for tax (employed and self-employed) is confusing.
What seems certain is that any existing contractors who are classified as ‘dependent contractors’ will pay more tax (e.g. National Insurance Contributions) – although the flip side is they will also receive certain employment rights (holiday pay, sick pay, etc?). However, IT contractors we have contacted don’t want rights, they seem to prefer the flexibility (and tax benefits) of self-employment without rights.
Public Sector reforms
Another move towards the demise of IR35 was the announcement of public sector reforms in 2016 (effective April 2017). This placed the burden of deciding on whether workers were inside or outside IR35 with the Government Department or third-party agency.
The result was a contractor exodus from the public sector. Some contractors have increased their ‘public sector’ rates by 20% to compensate for increased taxation. The Government argues it has resulted in many people securing workers’ rights. Will they use this argument to justify extending the changes to the private sector?
The benefits for the Government are clear. The move would attract talent back into the public sector and give rights to the exploited workers highlighted in the Taylor Review.
It would also be a step towards fixing the tax deficit. The Treasury estimate the shortfall in tax collected from the self-employed compared to employed workers is £3bn a year. There are rumours the Government also intend to raise self-employment taxes to narrow the gap.
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