IPSE warns IR35 reforms could increase SME tax burden

The Association of Independent Professionals and the Self Employed (IPSE) has announced that proposed changes to the intermediary rules (IR35) for UK-based public sector contractors will hamper SME efficiency.

The IPSE claims that IR35 reforms will increase the tax burden on small businesses, whilst putting unnecessary roadblocks in the way of SMEs’ delivery of vital projects.

Within the Budget 2016, the Government confirmed it will reform IR35 rules for off-payroll workers who operate through an intermediary e.g. their own limited company, in the public sector.

From April 2017, where workers operate through their own limited company – known as a Personal Service Company (PSC) – the public sector body, agency or third party paying the worker’s company will be responsible for applying the IR35 rules. The public sector body, agency or third party will also be liable to pay associated income tax and National Insurance.

The Government launched a consultation on the IR35 reform proposals last month. In his foreword to the document, David Gauke, Financial Secretary to the Treasury, said: “There is evidence of widespread non-compliance with the legislation.

“This is both unfair to those who pay the correct taxes on their income, and costs the Exchequer a significant amount of revenue each year.

“The Government believes public sector bodies have a duty to ensure the people working for them are paying the right tax.”

However, Chris Bryce, CEO of IPSE, responded to the consultation by claiming public services will suffer under the reforms and that government spending is more likely to increase than fall if they are implemented.

“All businesses should, of course, pay the tax they owe. But the plans will impose disproportionate and punitive taxes onto the smallest businesses, and these talented and cost-efficient experts will simply shun the public sector entirely for private sector work,” said Bryce.

“The Government will be forced to use extremely expensive Big Four consultancies to deliver the work instead.

“This will be more expensive for public sector bodies and will prevent [the] Government from meeting its target to contract with the smallest businesses.”

Bryce believes if the Government really wants to grow its revenue from employment taxes, it should simply recruit more staff. Bryce said that instead the Government was “proposing to tax freelancers as employees whilst denying them even basic employment rights”.

“This proposal is exploitative, unnecessary and ill-thought out,” concluded Bryce.

Date published 3 Jun 2016 | Last updated 3 Jun 2016