Contractors dismayed at higher tax bill

By Simon Read
Personal finance reporter

  • Published
Melissa HollowayImage source, Melissa Holloway
Image caption,
Freelancer Melissa Holloway

Many self-employed people face a higher tax bill from 2020 when the IR35 rule is extended to the private sector.

It will force thousands of contractors and freelancers to pay income tax, as well as National Insurance (NI) at the 12% rate, rather than a lower rate.

But many say the new rules will make firms too scared to employ them.

They reckon the rules will not just hit their job prospects, but their finances and the flexibility of their chosen careers will suffer too.

Melissa Holloway, a freelance medical copywriter and healthcare industry consultant, told the BBC: "It's not about trying to cut down on tax. It's about making more room to give back to the community and for your family."

Confusing and woolly rules

Melissa has been freelance for four years and says she prefers it, as it allows her to spend more time volunteering in her community and running a small charity, as well as devoting more time to her three-year-old.

She added: "My husband and I eat dinner with our son most evenings, which wouldn't be possible if I were working late and and travelling as much as I did as an employee."

She warned that the new rules are "confusing and woolly" after discovering that two of her recent jobs would be regarded differently under HMRC's Check Employment Status for Tax: "It said one was outside the intermediaries' legislation and one was inside," she reported.

Image source, Iona Bain
Image caption,
Iona Bain

Freelancer Iona Bain, founder of Young Money Blog & Agency said the proposed changes "scare me enormously".

She said: "Those who benefit from fooling HMRC over their employment status are businesses trying to avoid National Insurance, not the majority of freelancers trying to make ends meet.

"But these rules mean many self-employed workers will be wrongly re-employed on higher taxes without any of the benefits that full-time employees enjoy."

She said she has experienced many instances of employers wrongly classifying her for tax and pension purposes, costing her time and money. "That will be nothing compared to the confusion and complexity caused by these rule changes."

Massive skill shortage

IT contractor Eddy Henry has calculated the new rules will cost him £1,162 a month. But he predicted that companies will panic and to avoid problems, will put all their contractors on IR35.

"The immediate hit will be massive, as every contractor I know will leave," he said.

There is already a massive skill shortage in the UK IT industry and if he's right, IR35 will make things worse.

That fear is echoed by IT recruiter Leigh Carrick-Moore, founder of e-Search Consulting. She warned: "Extending IR35 to the private sector is prohibitive to the encouragement of a flexible and highly-skilled workforce in the UK.

She predicted it could lead to the contract market drying up and move to other tech hubs, such as Amsterdam or Berlin.

Eddy Henry said politicians had to learn to understand how things worked in the IT sector. "Whoever is pushing this does not understand contractors, the value we add or the risks we take in employment."

Iona Bain holds a similar view. "Politicians don't know what it's like to be self-employed. They don't know what it's like to chase up invoices, wonder if they'll get paid this month or worry about having to make their own pension provisions," she said.

"If they lived in our shoes for just a month or two, maybe they would get that IR35 is not just a financial but a psychological shadow, hanging over all of us."

How will the new rules work?

For IR35 to apply, you have to work through your own company for another business.

If the way you work is similar to an employee of that business, you should pay income tax, and National Insurance at the 12% rate.

Up to now, many contractors in personal service companies have been paying less tax and NI. But from April 2020, larger businesses - such as banks - will take on responsibility for deciding which contractors will need to pay more tax and NI.

The rule change will not apply to the smallest 1.5 million businesses.