Financial secretary to the Treasury Mel Stride said there was evidence that the UK exchequer could be losing out by as much as £1.2bn a year by 2023 as a result of taxpayers incorrectly paying tax as if they were self-employed.
“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy,” he said.
“But it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services. That’s why we’re consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance.”
The existing off-payroll working rules (IR35) were introduced in 2000 to stop taxpayers avoiding employment taxes by working through their own companies. They were toughened up for the public sector in April 2017 when responsibility for deciding whether the rules apply and for deducting the appropriate taxes passed from the individual contractor to public authorities.
However, the government is looking at the case for extending the tougher regime because estimates suggest that in 90% of private sector cases the IR35 rules are not applied correctly.
Earlier this year, HMRC won a significant IR35 victory against former Look North presenter Christa Ackroyd.
Ackroyd was appealing against a large tax demand in relation to the tax years 2006/07 to 2012/13, while she was working at the BBC through her personal service company, Christa Ackroyd Media.
However, HMRC argued that she owed £419,151 in income tax and NICs during that time because she claimed to be self-employed when she was not.
Ackroyd is not the only BBC presenter to find herself in trouble with HMRC. The department is currently looking into the tax affairs of as many as 170 freelance staff at the public broadcaster who were paid through personal service companies, to see whether they were in breach of the IR35 rules.
Ackroyd’s predicament led to shocking revelations in front of the Digital, Culture, Media and Sport select committee which had launched an inquiry into the BBC’s relationship with its freelance staff.
Giving evidence to the committee, broadcaster Kirsty Lang revealed that her request to the BBC to work part-time for personal reasons had only been granted on the basis of her becoming a freelance worker and setting up a personal services company.
She explained that for financial reasons she had to go back to work immediately after her step-daughter’s funeral and she was forced to work while she was undergoing treatment for breast cancer as her contract did not allow for sick pay.
Lang told the select committee that, following last year’s change in the IR35 rules, the BBC told her she would be paid through PAYE for tax purposes. This meant facing the pre-payment deductions an employee would face, but without the employment rights.
HMRC is not getting its own way in all the IR35 cases currently in the pipeline. Earlier this week, Ian Wells, a public sector IT contractor, won his appeal against a tax demand for £26,000 in back income tax and NICs relating to his work on the Department of Work and Pensions’ Universal Credit project between 28 May 2012 and 4 April 2013.
HMRC argued that for those 10 months he should have been treated as an employee since his work was not casual, he was required to turn up to work every day and he worked from 8am or 9am until 6pm.
However, the judge said she was satisfied that the relationship was “consistent with a contract for services, not a contract of service”.
Commenting on the new consultation, Tim Stovold, head of tax at Kingston Smith, said that HMRC recognises that it doesn’t have the resources to visit each of the one million companies that could be on the wrong side of the existing rules.
“This change would allow the taxman to visit the far fewer businesses that use the services of multiple limited company contractors and thus deal with large numbers of them in one compliance visit."
He warned that, while it would be a major win for HMRC, it would risk "creating an environment where businesses erring on the side of caution will cost genuine freelance contractors substantial additional amounts of tax and national insurance”.
Mike Cherry, national chairman of the Federation of Small Businesses, agreed. "Having responsibility for complying with off-payroll rules means paperwork," he said. "By weighing employers down with this admin, you’re threatening to reduce the flexibility with which they can utilise the genuinely self-employed. That flexibility is a key selling point for contractors.
“The fear of making an honest mistake could stop employers taking on the genuinely self-employed, even when it’s clearly the right thing to do. Any rule changes made off the back of this consultation need to be straightforward, transparent and come with minimal disruption to small employers who don’t have big HR departments or legal teams."
He pointed out that the self-employed community was now 4.75 million-strong and urged the government to think carefully about any changes that could stifle the vital contribution the self-employed were making to the economy.
The deadline for the government’s consultation is 10 August 2018.