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The HMRC is part way through a major consultation on the reform of off-payroll working, aka IR35, in the private sector which ends on 10th August.
Their premise is that two people undertaking the same work, one employed and one working as a contractor working through their own Personal Service Company, end up “paying very different levels of tax” which HMRC deem to be unfair. As a result, HMRC are considering rolling out the reforms introduced in 2017 to off-payroll working in the public sector to the private sector.
Their main illustration in the consultation document available here compares the level of tax paid by Charlie, a contractor working through his own company, and Thomas, an employee. If anything, the illustration overstates the amount of tax that Charlie would pay. Any accountant or tax advisor worth their salt would ensure that less is paid.
The over-arching undercurrent of the consultation is that the actions of contractors using a Personal Service Company is borderline tax avoidance and, as such, against the public interest.
It is hardly breaking news, but a contractor earning the same as an employee will pay less tax!
On the other hand, the consultation ignores that the contractor usually has a minimal notice period and has waived employee entitlements and benefits such as holiday pay, sick pay, workplace pension auto-enrolment and the right to bring a claim for unfair dismissal.
Moreover, maybe understandably, the consultation is blinkered on tax. The HMRC estimates that “the cost of non-compliance in the private sector is high and growing – projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.”
Personal Service Companies are not elaborate tax structures funnelling vast sums of money offshore. These are small businesses and, if we accept the HMRC estimates, whilst these monies are not going to the Exchequer, they are being spent in the UK economy.
However, the biggest flaw in the consultation is that the private sector is not the public sector. The public sector is predominantly made up of monolithic organisations with hefty headcounts. The private sector is a broad canvas from the FTSE 100 to a start-up working from home.
Here lies the real danger. As Brexit approaches and the government is channelling its energies through the Department for International Trade to make the UK a centre for innovation, this reform would be a death knell for start-up and early stage businesses.
Whilst the UK offers some fantastic incentives for innovation, these are largely after the fact. The R&D Tax Credit will provide a much-needed cashflow stimulus but, for a start-up today, only in fifteen months’ time.
At CooperFaure, we are working with an array of start-up and early-stage businesses across a wide range of sectors and they all engage contractors.
There is no doubt under the myopic vision of the HMRC consultation, these contractors would be deemed to be employees. However, there is a bigger picture.
For a start-up, cash management is one of the cornerstones for success and engaging a contractor is a less expensive and more flexible option. Not to mention, less administratively burdensome.
The rationale is not to avoid tax rather to provide a stepping stone to a more mature business. We can site numerous cases where a start-up has evolved through the use of contractors and is now employing a substantial workforce.
As with any consultation, it is vital to make your voice heard. Not just the voice of the contractor but also the voice of the entrepreneur and business owner.
The official channels to respond to the consultation are by email to offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk or by post to IPD Employment Status and Intermediaries Policy, Room 3/46, 100 Parliament Street, London, SW1A 2BQ.
However, you should also consider writing to your MP, the details for which can be found here, or to the Chancellor directly at HM Treasury, Horse Guards Road, London, SW1A 2HQ.
In the meantime, if you have any questions or concerns, please email us at tax@cooperfaure.co.uk.
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