Danny McCance 12 Oct 2018 12:28pm

Budget 2018: Hammond to overhaul self-employed tax

The Treasury plans to overhaul controversial tax rules around personal service companies

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.

A report from the BBC today said that the chancellor Philip Hammond could use the Budget later this month to announce a reform of the rules.

The Treasury estimates that as many as a third of those claiming to be self-employed as a “personal service company” actually work full-time and that non-compliance could cost HMRC as much as £1.2bn a year by 2023.

The changes would demand that businesses using personal service companies take responsibility to make sure that those contractors not on payroll adhere to IR35.

Research published last year found that the public sector is losing top talent due to IR35 reforms, with 71% of public sector projects being cancelled or delayed as a result of talent leaving.

One of the big losers has been the NHS, which has seen 25% of its departments lose half of their flexible staff.

Earlier this year, HMRC won its first IR35 ruling in nine years against former BBC presenter Christa Ackroyd.

Estimates from HMRC suggest that a similar move in the public sector has raised £410m since 2016.

ICAEW has previously called for the proposed IR35 reforms to be postponed until at least 2020.

Anita Monteith, technical lead and senior policy adviser in ICAEW’s Tax Faculty, said that the ICAEW has made representations stating that at the moment it feels that there are sufficient problems with the way the system is working within the public sector and therefore further changes should not be made until the current issues have been solved.

"We accept that you can’t have two systems in the long run, but we do think that these things need to be resolved first.

"We will then need time for the many, many more engagers in the private sector to be trained and have the rules explained to them before any change is made. April 2019 too early," Monteith said.

Meanwhile, in an interview with the BBC’s economics editor Kamal Ahmed today Hammond said that there would be a “deal dividend” for the UK if a good deal on Brexit can be reached.

The chancellor pointed to the Office for Budget Responsibility’s forecast as the basis for the government’s current projections, explaining it was essentially a mid-point between a no-deal and an Eurpean Economic Area (EEA) solution.

The EEA includes EU members but also enables non-members Iceland, Lichtenstein and Norway to be part of the EU’s single market to ensure free movement of people, goods, services and capital between the countries and the EU member states.

“The deal we’re trying to negotiate with the EU now represents an improvement from the point of view of the British economy over that mid point and therefore should deliver us an upside in the form of higher economic growth and better outcomes than were otherwise anticipated,” said Hammond.

Last week, in its 2018 World Economic Outlook report, the International Monetary Fund downgraded the UK’s growth forecast from 1.7% to 1.4% for 2018.