Chancellor pushes forward giving with one hand then taking with the other.

Rushi Sunak pushes on with freelance reforms and considers higher tax for owner-managed Limited Company firms

The Chancellor Rishi Sunak is set to push ahead with plans to bring in cash grabbing tax reforms for freelance workers in April and is considering beefing the tax regime is an attempt to collect billions from some company owners, the press has learned.

A spokesman for the Chancellor said Mr Sunak has no plans to shelf reforms for IR35, the legislation is designed to tax the ‘disguised’ employment of freelance and contract workers at a rate similar to staff positions within the private sector.

The broad stroke IR35 rules are supposed to take on private sector freelancers who operate via Personal Service Companies or Ltd companies to close tax avoidance loopholes from April. The approach that the Government has taken is to lump everyone that they don’t really understand in the same bucket taking the “guilty” unless proven “innocent” approach.

There had been rumours that the Government would postpone the reforms or scrap them completely, after Her Majesty’s Revenue & Customs (HMRC) lost a number of high-profile cases against well-known figures, particularly those working in broadcasting.

The IR35 rules will take on private sector freelancers who operate via Personal Service Companies to close tax avoidance loopholes from April, so Sunak confirms.

“So, the government takes the easy road again, tarnishing all those businesses that are actually not looking for the loopholes in taxes but providing experienced and trusted flexible or short-term skills.” States Craig Ashmole, founding Director of CCServe Ltd, a London based IT consulting firm. “Corporate businesses need access to flexible skilled and experienced resources, often to be the enabler for changing organisational structures, or transforming tech. These pieces of work are not long-term functions for an organisation and would typically require large salaried people to attract the experience that’s so often required. Do they just hire then fire the staff once the transformation is completed?”

As well as broadcasters hundreds of thousands of other workers who operate under the umbrella of a limited company – or Personal Service Company – such as IT consultants, delivery drivers, builders, plumbers and administrators will also find themselves hit by both the introduction of the IR35 reforms and possibly launch of a new tax band for smaller one-person limited companies.

In all HMRC has lost around a third of the cases it has brought since 2017 in attempt to recoup tax and national insurance from companies employing freelance workers and the workers themselves.

A Treasury spokesman said: “It is right to ensure that two individuals sitting side-by-side and doing the same work for the same employer pay the same tax and national insurance contributions. We have been clear that the reforms will be introduced on 6 April 2021.”

What they fail to recognise with the above statement is that – The short-term flexible engagements are just what it says on the tin, ‘Short term flexible work’ and the Ltd Company consultant takes all the risk. Once they have finished their assignment there are no guaranteed further contracts, they have to go out and search for those. There are no paid holidays, pensions or health benefits paid to the flexible workforce, so one could argue why are they really comparing them then?

April’s Government reforms of IR35 will see more privately held companies taken on for ‘employing’ freelancers on regular contracts, it is the contracted worker that will end up paying the additional income tax as well as being forced to make a great contribution to National Insurance. The company itself will be told to pay its own NI contribution if a tribunal confirms the worker was effectively employed.

This has driven is an approach larger corporates have taken, which is, a blanket classification that all contractors are inside IR35 which moves the responsibility away from the business putting the burden back on the contractor, even if they are genuinely not being a ‘hidden’ employee. 

Treasury sources have also suggested the Chancellor is still weighing up plans to increase treasury coffers further, with a potential new tax band being introduced to target owner/managed limited companies with one clear major client.

Mr Sunak is believed to be considering raising the 19 per cent Corporation Tax rate for such limited companies to around 21 per cent to claw back more tax revenue it believes these firms are currently avoiding using legal loopholes.

Apart from some high-profile broadcaster cases that may need to be determined if they are exploiting tax loopholes, the majority of those caught in this ‘pigeonhole’ such as IT consultants, delivery drivers, builders, plumbers, and administrators are not. It really isn’t fair to classify them all as tax avoiders, but perhaps just hard-working flexible resources providing needed experience to challenges businesses have? At least they are not exploiting the countries benefits system and keeping unemployment numbers down.

Mr Sunak is also expected to extend the furlough schemes for both self-employed and employed workers while the Government’s roadmap to reopening the UK economy fully by 21 June plays out. To put that in perspective, anyone that has been a limited company director under the personal service company arrangement has not seen a sniff of furlough payments, nor any other financial support, apart from loans that they must pay back, unlike furlough support.

So the reality is HMRC believes this reform will recoup supposed lost taxes, in some small amount of cases there will be tax recoveries, but when looking at the other sectors outside of possibly the broadcasters, like the general IT consulting market for example, they will just collapse, some might get permanent positions. Skills will, however, move off-shore to expensively run consulting corporations paying salaries to low-cost staff outside of the UK. So the winners are the large corporate consulting companies, the losers are the HMRC on tax recovery. The real losers will be the innovative flexible workforce while unemployment rises.

Having spent a majority of my career working with and supporting the Corporate CIO Function, I now seek to provide a forum whereby CIOs or IT Directors can learn from the experience of others to address burning Change or Transformation challenges.
Craig Ashmole

Founding Director CCServe