In Victor Hugo’s masterpiece Les Misérables, police inspector Javert pursues the hero, Jean Valjean, with a single-minded doggedness, immune to all reason, determined to catch someone only he really considers to be a criminal. One can only assume that Philip Hammond is a fan, given his determination to pursue freelancers and contractors to the ends of the earth.
Last year, Hammond was forced to retreat on his attempt to subject the self-employed to higher National Insurance Contributions (NICs). Not to be deterred, Inspector Hammond has changed tack; in this year’s budget, his focus was on off-payroll working rules, known as IR35.
It is Hammond’s belief that more self-employed contractors — many of whom (including me) provide specialist IT, engineering and consulting services — should be considered as employees for tax purposes.
As Hammond put it in his budget, his changes are designed ‘to ensure fairness so that individuals working side by side in a similar role for the same employer pay the same employment taxes’. However, his rhetoric is misdirected. It is primarily companies that are now avoiding tax by hiring contractors rather than individuals.
It has long been standard practice for contractors to set up ‘personal service companies’ as a vehicle through which to sell their services. Lower earners and those who jointly own companies with their spouses can still benefit from increased tax efficiency — for example, someone earning £50,000 can save around £9,000 in tax by taking the optimal mix of salary and dividends rather than just a salary. Tax can be further reduced by also paying dividends to a spouse. However, changes made in 2016 to how dividends are taxed have made this approach much less advantageous to higher earners (i.e. over £100,000).
For companies, the major attraction is not having to pay employer’s NICs. The BBC was one of the most enthusiastic proponents of this approach, with the result that HMRC now has more than 100 separate investigations into their workers. One notable casualty was the former BBC broadcaster Christa Ackroyd who was judged liable for £400,00 of unpaid tax. The unfairness is that it is the contractor who is judged liable for the extra tax when in fact it was the BBC that had encouraged and benefited most from the arrangement.
The changes will make it a little fairer in that, from 2020, the onus will be on the employer to identify ‘deemed employees’ — an arrangement which matches current regulations in the public sector. Companies will then be obliged to make tax and NI deductions for these employees and pay them to HMRC. While this removes much of the risk to the contractor, in many cases this extra tax will just be taken out of the contractor’s day rate. It will also cause panic in HR departments, many of whom are unprepared for these changes. Determining whether someone falls inside or outside IR35 can be challenging and time-consuming, even for experts. As a precaution, many companies may simply apply a blanket IR35 status to all contractors and freelancers rather than consider individuals on a case-by-case basis, even though this practice has been declared illegitimate by judicial review.
Although the Treasury believes this move could raise £2.9 billion by 2024, this figure has been disputed by industry insiders and takes no account of damage to the wider economy. Many projects in the public sector have stalled as contractors walk away rather than accept a pay cut.
Inevitably, these changes will make it less attractive for workers to become contractors, meaning that companies with a need for temporary help in a specialist area will find it harder to find that talent. The UK’s flexible freelance workforce is a significant competitive advantage and now more than ever it should be supported rather than threatened in the Treasury’s hunt for loose change.
So how can contractors prevent themselves and their clients from becoming ensnared by IR35? The trick is to think bigger. Although Hammond has targeted personal service companies, behaving like a company is the best defence. Don’t just call yourself Joe Bloggs Consultancy — think of a brand, create a website, give yourself a natty job title and write a business plan. Don’t limit your horizons to the current services you provide to your current client.
The determining factor, though, is autonomy — if you are told what to do, how to do it, where to do it, when to do it, and you are obliged to accept work offered and they are obliged to offer you work, then you are likely to be treated as a ‘deemed employee’ for tax purposes. To avoid this, you must assert your independence. You shouldn’t be instructed in how to provide your services. If you want to take a half-day or a holiday, you shouldn’t need to ask permission. Provided the scope-of-work is met within the agreed time, why should your client care when you do it? When agreeing contracts, it is essential to make sure there is no reference to fixed hours in your contracts or a termination period.
As Dave Chaplin, CEO of Contractor Calculator, a leading online resource for contractors, says: ‘The contract paperwork is key when defending one’s status, and it is essential that it reflects the true reality of the engagement. The self-employed and those hiring them can no longer afford to use cobbled-together contracts as they create future tax risk.’
Crucially, you must only be paid for work done, not just for hours that you’re present. Being paid even if there is no work for you to do is a red flag to HMRC. In any case, as a point of principle, I refuse to twiddle my thumbs on my client’s time. If I can’t proceed with a task for some reason, then I inform my client that I’m going home until I can continue. Clients usually appreciate this honesty.
Finally, consider diversifying your income stream. As a contractor you shouldn’t have exclusivity clauses in your contract, except for direct competitors. I try to work three or four days a week for one client and spend my other time working for other clients, developing my own software, writing articles and learning new skills.
So, while it’s dismaying that a Conservative chancellor seeks to crack down on a vibrant part of the economy for questionable gains, it’s not impossible to escape his clutches. If you’re working for multiple clients under your own direction, then you almost certainly don’t have to worry about IR35. The increased autonomy also means that you’re probably happier — or at least less miserable.