Contractors and clients need to be familiar with tax rule changes, says KAREN HARVIE
For many years contractors have been an important and critical part of the UK’s working population, a type of engagement which has provided benefits for both companies and individuals. Indeed in recent years we have seen a substantial increase in individuals leaving salaried employment and assuming contractor status, and instead providing services through their own company.
In short, a person does the same job with a business or organisation receiving the same service but the employer/employee relationship has essentially been replaced with a supplier/client relationship.
The reasons for changing this status used to be clear: a company is able to discharge their normal employee obligations, such as paying pension benefits and employer National Insurance Contributions (NICs) and the provider or individual can pay themselves a salary and also draw dividends, meaning they pay less tax and NICs than they would as employees.
However – and it’s a fairly sizeable however – rules, known as IR35 were introduced in 2000 to try and counter tax avoidance by the provision of personal services through an intermediary company, or personal services company (PSC).
To be caught by IR35 rules means the individual who supplies the service is considered by HMRC not to be a genuine self-employed contractor, but a disguised employee. The consequence of this is that they are classed as subject to income tax and NIC as though they were an employee.
As a result of wide-spread non-compliance with the rules, a change introduced in April this year had the effect of transferring the responsibility of determining whether someone was a disguised employee from the PSC to the client end-use (where it is medium or large).
The client is now responsible for accounting for income tax and NICs via payroll and failure to do so correctly can be serious. In reality, many firms have taken a belt and braces approach to this, meaning that an increasing number of suppliers are now caught in the IR35 net.
So, as it stands, the previous benefits, for both parties, have gradually been worn away, and certainly for contractors, the advantages were becoming minimal.
But there’s more. Even the potential advantages of being a contractor outside of IR35 have been hit with the recent announcement by the UK Government on funding for social care, in particular, the rise in NI contributions (NICs).
Currently, their company (PSC) is being paid gross and as such they could pay themselves less salary and a higher dividend. However – yes, another one – from April 2022, their company will make increased NICs of 1.25% as an employer as well as an additional 1.25% in employee NICs. Double whammy.
And that’s not all. Just to top it all off, the 1.25% increase will also apply to the tax on dividends.
Simply – more tax.
In summary, the last 18 months or so have seen many contractors experience a pretty tough time with the pandemic and lockdowns, and now the announcement of what are effectively rising taxes will be a further blow.
Nevertheless, it is vital that those who choose this option or already work this way familiarise themselves with the tax rules and employment laws to ensure that they are fully armed to make the best decisions for themselves.
Although being a contractor may not be quite as attractive as it once was, there may still be good reasons why it would be suitable – getting the right professional advice could be your best business decision this year.
Karen Harvie is senior associate, employment law, Aberdein Considine