Profitably employed
The laws have changed on self-employment and this may affect many IT contractors, notes Ben Dunn
New rules on self-employment came into effect on 6 April that will affect IT contractors and consultants.
So far, they have provoked a diverse reaction within a range of industries. Some welcomed the changes as a move to protect workers previously exploited in the sense that defining them a certain way meant they received no access to sick pay or paid holidays, for example.
Yet others see it as an infringement of their rights and think the government motive is primarily to raise revenue by collecting more income tax or National Insurance (NI).
Many IT workers choose to be self-employed for the relative freedom, while the sector itself tends to depend on contractors to fill skills gaps or work on temporary, specific projects.
In the new legislation, HMRC is aiming to reduce the amount of people defined as self-employed who should not be – "false self-employment", you could say.
It has done this in part by removing the criterion of "personal service" (the right of substitution) as an argument for a worker claiming to be self-employed.
This means that a worker will have to be paid via PAYE if they are under the direction, supervision or control of an intermediary.
The Treasury has made clear that if a worker is engaged by an intermediary, "there will be a presumption that there is control over the worker" and "they will be treated as an employee for tax and NI purposes".
This puts a burden of proof on the intermediary furthest up the supply chain, for example the employment agency.
They must prove a lack of supervision, direction or control in cases of legitimate self-employment. Furthermore, if a worker is not proven to be self-employed, any liabilities for unpaid PAYE and NI again rests with the intermediary furthest up the supply chain, in most cases the agency.
Inevitably, this will have significant implications for agencies in terms of the paperwork involved to meet this burden of proof.
HMRC has issued guidance notes to assist in the interpretation of the legislation. From the examples given it seems that many contractors working in IT who were previously engaged on a self-employed basis may now be deemed to be employees unless they can prove otherwise.
Those who are against the measures see this as removing some of the flexibility that contractors have traditionally enjoyed.
And while so-called false self-employment can be exploitative in industries such as construction, where there are many low-skilled workers, many professional freelancers in the IT sector are self-employed as a personal choice.
There are financially viable alternatives available to those who wish to remain self-employed.
HMRC has confirmed that Personal Service Companies (PSCs) will not be affected by the new legislation if:
• remuneration is already taxed as employment income or
• remuneration is not in consequence of the worker providing their services under the contract (that is, dividends).
However, HMRC is also aware that workers may incorporate a limited company as a result of the changes.
To counteract this, they have introduced a targeted anti-avoidance rule (TAAR) which will allow HMRC to consider the motive for setting up a particular arrangement, for example, if it is deemed to have been set up solely for the purpose of avoiding tax.
If this is believed to be the case, HMRC may be able to reclassify dividend income as employment income.
Working through an umbrella company has also been a popular way for IT contractors to pay themselves in a legitimate and tax-efficient manner.
Fortunately, HMRC has confirmed that a compliant umbrella company which employs its contractors and deducts PAYE from their earnings will be unaffected by the changes.
Contractors who work through their own limited company and pay themselves via dividends or a director's fee will also be unaffected, making the umbrella company the best low-risk, cost-effective option.
One of the criticisms levelled at the legislation is the speed with which it has been introduced, following a relatively short consultation from 10 December to 4 February.
Many in the industry feel this was insufficient time to evaluate the proposals and present a detailed response. Others have criticised the measures for their perceived lack of clarity.
What is certain is that the issue has stirred up strong feelings. The effect will be felt more keenly in some industries than others, although it remains to be seen whether or not the new measures will have any sort of positive effect on the IT sector and its personnel in the long term.
Ben Dunn is finance director at JSA