Hammond’s IR35 tax foray

Private sector businesses have been advised to think carefully about whether the Chancellor’s IR35 budget raid applies to them—in many cases, it may not.

Chancellor Philip Hammond’s budget this week extended to the private sector an existing tax on public sector organisations that hire consultants and self-employed people who would otherwise be an employee. Large and medium sized businesses with more than 250 employees will be obliged, from April 2020, to deduct tax from the pay of consultants who work through personal service companies.

The aim of the tax reform is to stop people avoiding tax by using the shield of a personal service company to hide their employment status.

However, James Medhurst, employment law solicitor at Fieldfisher, said: ‘Crucially, the changes only apply if the relationship with the consultant resembles an employment relationship.

‘Many businesses are naturally worried that, if they start to make these deductions too widely, many of their consultants will defect to their competitors and, therefore, this is a decision which should not be taken lightly. HMRC has recently lost several IR35 cases before the Tax Tribunal, and the changes are unlikely to affect anywhere near as many people as the government has predicted. When similar changes were introduced into the public sector, many public sector bodies took HMRC’s word for it that the legislation applies, but private sector businesses would be advised not to do the same.’

Chris Sanger, EY’s head of tax policy, said it was important that the government ‘address the problems that are present in the current scheme’ before April 2020 or there would be ‘a strong risk that the implementation will be problematic and potentially undermine the availability of the UK’s flexible workforce’.

HMRC will publish a consultation paper outlining the details of the reforms in the next few months.