New proposal looks to combat £430m personal service loophole » SMEInsider

New proposal looks to combat £430m personal service loophole

The government has put forward a proposal that seeks to cut down on the amount of freelancers avoiding tax by policing the businesses that employ them.

The HMRC document intends to ‘‘start a dialogue with business on how to improve the effectiveness of the existing intermediaries legislation, commonly known as IR35.’’

Designed in 2000, the legislation seeks to tax ‘‘disguised employment.’’ HMRC hoped that IR35 would encourage freelancers who operate through a ‘‘personal service’’ company to pay a similar amount of tax to that of regular employees.

The new proposal looks to increase the tax costs for freelance workers, unless the worker is genuinely self-employed.

Chancellor George Osborne is spearheading the legislation, as he looks to combat the ‘‘increasing abuse of the rules around disguised employment,” with many freelancers avoiding tax deductions as they provide their expertise through a personal service company.

HMRC officials estimate that during 2015, the cost of non-compliance regarding IR35 will total a staggering £430m.

If abuse of IR35 continues, HMRC predicts that the deterrent effects of the tax will come under threat, with the tax rules estimated to have protected about £520m of tax receipts in 2010-11.

The number of personal service companies in the UK is growing. In 2012/13, the government predicted that there were 265,000 personal service companies operating in Britain, which is an increase of 65,000 on 2011.

Today, more than half a million British workers take their income through a personal service company.

The proposal could put strain on some SMEs who don’t have the time, effort or money to look into its taxes thoroughly, with the discussion paper noting that some may find it difficult to determine whether IR35 applies to a particular person.