Budget changes look increasingly likely for freelance contractors

17 November 2017

For contractors providing their services through their own companies (known as Personal Service Companies or PSCs) to client companies, it is their job to account for any income tax and NIC due on their earnings if they are not genuine freelancers under what is known as IR35. Around 450,000 people do this. HMRC's view is that the vast majority of these don't properly account for the tax and NIC they are due to pay under these IR35 rules.  

HMRC pressed for new rules to be brought in which would make it the job of the end-user "employer" company to assess whether contractors who provided services to them via their own PSC's‎ were caught by the IR35 rules, and, if they concluded they were, have to deduct income tax and NIC from what they paid them and pay it over under PAYE. This, after all, was what they had to do already with contractors they took on directly as individuals.

Subsequently, tax rules along these lines were introduced in April 2017 for public sector bodies (such as the NHS, local government, schools and the BBC for example). The NHS, for example, must now assess whether a locum nurse or doctor providing their services via their own PSC is caught by IR35 and, if they are, deduct tax under PAYE from what they pay them. This has led to public sector bodies adding about 90,000 people to their payrolls in the three months to 30 June 2017. It has also, though, led to labour and skill shortages in the public sector, as such IT contractors, locum doctors or nurses choose not to provide their services to the public sector and instead either choose to work less or work only for the private sector.  Agency interim labour to cover short term shortages of labour in demand spikes for example is a key part of labour planning in the public sector. These new rules apply as much to agencies providing labour via PSC to public sector bodies.

Because of this, and to be honest as was expected at some point by the tax profession, the government look increasingly likely to extend these rules to all engagers of workers via PSCs to level the field between public and private sector‎. Press coverage over the weekend suggests announcements will be made in the Chancellor's budget on the 22nd November.

Therefore all companies who engage contractors via PSCs (or via agencies where the contractors provide their services to the agency via PSCS) need to watch out for announcements in the Budget about such new rules being introduced, when they are coming in from and then take advice on how to manage their position. If these new rules do come in, it will lead to an increase in labour costs for companies who engage PSC contractors and an administrative headache for such companies as to how to apply the rules. That has been the public sector's experience since April this year.

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