Self-employed contractors – can SME’s benefit from the new government portal and challenges to the rules?
Last month HMRC launched a web portal called the Employment Status Service (ESS) with the primary aim of helping public sector bodies to determine the tax status of their contractors https://www.gov.uk/guidance/check-employment-status-for-tax, but the site can also be used to give guidance to the private sector for those employers wanting to ensure they are not facilitating tax avoidance by their contractors.
Businesses will need to exercise caution though as the system has faced criticism for inaccuracy and in relation to its functionality. Concerns have also been raised that it fails to make a proper assessment of employment law. The subtle differences between the rules to determine whether a person is self-employed for tax purposes and employment law purposes have caused confusion for a number of years. One of the key tests to determine whether a contractor is genuinely self employed is if they can supply a substitute. Just by indicating that a substitute can be supplied is adequate for the online tool to determine self employed status, however this will not be so clear cut for employment law purposes, which would look behind any agreement to determine whether a substitute could genuinely be supplied and if it would be acceptable in practice.
Changes to IR35 Rules which came in on 6th April mean that public sector bodies will need to treat contractors as salaried workers unless they can prove they conform to IR35 rules. Until now the onus has been on contractors to declare themselves “outside” of IR35 to avoid being taxed in the same way as permanent employees, and to conduct their business in a way that does not risk them being considered one. It is worth using the online tool and keeping the assessment as evidence should HMRC carry out an audit. Even if the status of the contractor has changed, this will be good evidence that they were previously assessed as self employed. It is also advisable to have a contract for services in place which sets out the intention between the parties.
Some in the public sector have predicted as a result of the changes that there will be an exodus of self-employed contractors to the private sector, particularly in IT fields where there are already quite severe shortages of skilled professionals. Currently reports have been largely focussed on large companies putting themselves forward to pick up disgruntled contractors, like IBM, Accenture and Capita, but smaller companies may also be able to benefit from a better recruitment environment.