The new rules are designed to tackle tax avoidance by contractors who HMRC believe would be employees if they were not using a company structure
The new rules are designed to tackle tax avoidance by contractors who HMRC believe would be employees if they were not using a company structure © Tolga Akmen/FT

Freelance workers are being left in the dark by hiring companies about far-reaching tax changes starting next year, which business groups have warned will embroil workers and groups in disputes and red tape.

From April 2020, all companies — apart from those with fewer than 50 employees or less than £10.2m annual turnover — will be required to assess the employment status of any contractor they use. The policy will bring the private sector in line with the public sector, which has been operating in this way since 2017.

At present, contractors who use a limited company structure to offer work to private sector clients decide whether they are subject to regulation known as IR35. The new rules are designed to tackle tax avoidance by contractors who HM Revenue & Customs believe would be employees if they were not using a company structure and should therefore be paying employee taxes.

But despite the upcoming change, 92 per cent of contractors had not been contacted by their client or recruitment agency to discuss the reforms, according to a survey by Qdos, an adviser on contractor taxes.

Seb Maley, Qdos chief executive, said businesses were likely to be waiting for the results of a government consultation into the reforms, which closed on Tuesday. But he was worried about the lack of time between now and next spring.

“Accurate IR35 decisions are made with joined-up thinking and input from each party in the supply chain,” Mr Maley said. “Therefore, we urge the businesses engaging contractors and the agencies placing these workers to start preparing for IR35 reform now, irrespective of any potential tweaks to the legislation.”

Andy Chamberlain, deputy policy director at the Association of Independent Professionals and the Self-Employed, a trade body, said he estimated that the draft legislation on the policy would not be published until July at the earliest.

“It is no surprise that clients haven’t spoken to their contractors about these impending changes. They simply don’t know what the new rules will be,” he said. “What we have seen so far [of the new rules] is too complex, totally unfit for purpose, and with so many variables that haven’t been decided. I am at a loss how businesses are expected to put processes in place in less than a year.”

Qdos’s research, published on Tuesday, also pointed to the reforms leading to a potential increase in business disputes, with 86 per cent of the 1,000 contractors surveyed saying they would challenge IR35 decisions made by their clients that defined them as employees.

Meanwhile, a survey of 500 companies by Brookson Legal Services, a law firm focused on IR35, found that 59 per cent were considering taking a blanket approach to assessing their contractors — because they did not have the time to make decisions about contractors individually.

“That a majority of firms are planning a blanket approach to IR35 assessments, is deeply alarming — and in direct contravention of the government’s stated intention,” Mr Chamberlain said in reaction to the research, also released this week. “The government needs to hit the pause button. It cannot push ahead with the reform while there are clear indications that businesses will not be able to comply with the new rules.”

In addition, 73 per cent of businesses said the IR35 reforms would have an impact on the number of contractors they hired.

Joe Tully, Brookson managing director, said: “The businesses surveyed operate across multiple sectors, revealing deep-seated unease. Many agree that contractors should pay the correct tax, but the current uncertainty around how it will work is a risk for a UK economy that is already battling political headwinds.”

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