Contractor or employee? New rules bring big decisions

Francesca Hutcheson, tax director at Dyke Yaxley Chartered Accountants, in Shrewsbury, said new rules were set to come into force on April 6 which would extend the scope of the IR35 tax regulations.

“The aim of the rules is to ensure that contractors who are working through their own limited company for medium and large-sized businesses in the private sector are paying similar taxes to employees.

“Currently contractors are responsible for determining their own employment status, but after the new rules are introduced, the business that employs them will be responsible for deciding their status and for making tax deductions where necessary.

“And despite the imminent deadline, the Government is currently carrying out a last-minute review with the purpose of smoothing the transition, although they have stopped short of delaying the implementation of the new system.”

Mrs Hutcheson said IR35 legislation allows HM Revenue and Customs to collect additional payment where a contractor is an employee in all but name.

“If a contractor is operating through their own limited company, and without that intermediary company they would be acting as an employee of the business, then IR35 kicks in.

“The extra payment compensates for the additional tax and National Insurance that HMRC would have received on an equivalent employee’s wages.”

Mrs Hutcheson said recent high-profile celebrity tax cases, including those involving TV presenters such as Lorraine Kelly and Kaye Adams, highlighted just how difficult it could be to determine employment status for tax purposes.

“The Government’s review will consult contractor groups and medium and large-sized businesses to see if there’s anything else that can be done to achieve a smooth and successful transition.

“In the meantime, if you’re a contractor, it’s important that you seek expert advice to review your business relationships with clients to ensure you protect your personal tax position.”