A relatively minor change put forward by Kwasi Kwarteng in his now-defunct mini-Budget was a proposed adjustment to the IR35 tax rule.
By working through a limited company it’s possible for individuals to lower their tax burden as they don’t have to pay national insurance (NI) or income tax. Initially, the burden fell on the employee to assess whether they fell under the IR35 tax rule.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, that changed in 2017 when the government made public sector employers responsible for determining contractors’ IR35 status. In 2021, this was extended to employers in the private sector.
IR35 tax rule changes are being scrapped
Kwarteng wanted to reduce the burden on employers as part of his growth plan. He wanted to go back to the old system where employees were responsible for managing their own tax positions.
Jeremy Hunt has decided to reverse this decision. The changes brought in last year will remain in place and bring in an extra £2bn a year in tax revenue, according to Treasury projections.
The decision to retain this piece of burdensome regulation has been criticised by those who are affected.
Dave Chaplin, CEO of tax compliance firm IR35 Shield, said: "Repealing off-payroll would have returned an essential level of certainty to contract transactions in the market economy, leading to economic growth. Instead, off-payroll will continue to cause significant harm to the self-employed, major businesses, the government, and the economy.”
Rule change will lead to more tax collection
The IR35 tax rule is one of the most contentious pieces of regulation the government has introduced in recent years.
Put simply, the rules define contractors’ employment status based on a set of principles such as working for a single employer or having little discretion about when and where they work.
Employees that are deemed to fall within the scope of IR35 (and thus qualify as being employed) have to pay employment taxes – income tax and national insurance – through PAYE like all other employees.
Campaigners argue that companies have reacted by pushing all contractors into the scope of the rules – lumping them with higher taxes – rather than risk falling foul of HMRC.
And companies are right to be worried: HMRC has become quite aggressive when policing the IR35 tax rule. That could be because some estimates suggest less than 10% of contractors pay the right amount of tax.
Now Hunt has scrapped Kwarteng’s proposed changes, it looks as if the fight between contractors and HMRC will continue.
-
Families suffer £20,000 lost income growth – are you feeling the pinch?Average incomes for working age families have increased by just 7% in the past two decades, research suggests
-
How to achieve a secure retirement, as more retirees admit to struggling with debtTwenty-six percent of retirees now have unsecured debt – a sharp rise compared to two years ago – with many underestimating how much a typical retirement costs
-
What are wealth taxes and would they work in Britain?The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
When is the self-assessment tax return deadline?If you are self-employed, rent out a property or earn income from savings or investments, you may need to complete a self-assessment tax return. We run through the deadlines you need to know about
-
HMRC warning after scammers target 170k taxpayers – how to stay protectedScammers are using increasingly sophisticated methods to trick people into sharing personal details or paying for fake self assessment tax refunds
-
HMRC rewarded tax informants with £850,000 as record fraud tip-offs sent to taxman last yearThe taxman was tipped off about 164,670 cases of alleged fraud last year, but total rewards given to snoops fell in the 2024/5 tax year.
-
HMRC savings tax crackdown: More workers to pay tax directly from their wagesBanks and building societies will be required to obtain National Insurance numbers from savers to make it easier for HMRC to tax those who breach their personal savings allowance
-
Do you still have to file a tax return if you don’t owe any tax?Even if you do not owe the taxman any money, failure to complete and submit your tax return could result in a penalty costing you up to £1,600.
-
What has changed with employers’ National Insurance – and how will it impact you?Will you feel the effects of the National Insurance hike, as businesses warn of redundancies, smaller pay rises and higher inflation?
-
Tax return: HMRC’s payments on account deadline is approaching – here is why it is unfair for the self-employedSelf-assessment taxpayers have just under a week to pay the latest instalment of their tax return, but is the charge fair? Marc Shoffman explains why this is hurting self-employed people
