Tax and Contractors – HMRC update

Too many contractors who should be abiding by the employment intermediary rules (IR35) have been paying less tax than they owe. Many have been working alongside public sector employees for years, working on the same projects, but have been paid differently because they have been providing their services through their own limited company and applying the employment intermediary rules incorrectly.

The rules are designed to ensure that when a contractor who is engaged through their own limited company has a “permanent” relationship with the, the same tax should be paid as if they were an employee. However his has rarely happened. HMRC estimates that contractors were wrongly classifying themselves as outside the rules in around 90% of cases. That is why, in April, new rules shifted responsibility for making the decision from contractors to the public body or agency employing them. No longer do contractors working in the public sector decide whether the rules apply to them. Since then, more jobs have been classified as within the intermediary rules, ensuring that many more people are complying with the law and, importantly, paying the right amount of tax.

There has been a great deal of misinformation in some sections of the media about the changes to the employment intermediary rules, including suggestions that there would be a mass exodus of contractors from the public sector. Apparently, this has not happened, according to HMRC, which has been monitoring this.