The Treasury (HMT) is finalising plans to overhaul tax rules for self-employed people, amid the belief that a third of people claiming self-employed status as a "personal service company" are actually full employees and should pay more tax.
It is looking at ordering firms that use personal service company contractors to take legal responsibility for ensuring 'off-payroll' contractors stick to the tax rules known as IR35.
Without reform, high levels of non-compliance with tax rules could cost HM Revenue and Customs (HMRC) £1.2 billion a year by 2023, HMT said. This is because full employees pay higher National Insurance contributions than the self-employed.
A similar move made in the public sector on 'synthetic' self-employed workers has raised £410 million extra in taxes since 2016, HMRC estimates suggest.
This move comes as chancellor Philip Hammond faces pressure to raise taxes in this month’s Budget following the prime minister's pledge to channel an extra £20 billion to the NHS by 2023.
Personal income tax allowances could be frozen, despite a Conservative party pledge at the 2017 election that they would rise to £12,500 for lower-rate taxpayers and £50,000 for higher-rate taxpayers by 2020.
In March 2017 the chancellor failed to gain parliamentary support for an increase in national insurance contributions from the self-employed and had to abandon the move.
Tania Bowers, general counsel at the Association of Professional Staffing Companies (APSCo), criticised the plans, adding that the changes would affect the labour market.
“We are extremely disappointed that HMT appears determined to discount the advice of APSCo, and every other influential body, and charge ahead with these changes, providing no time for business to adapt,” she said.
“Like the Confederation of British Industry (CBI) and the Association of Independent Professionals and the Self-Employed (IPSE), we maintain that these proposals will have an adverse impact on the strength of the UK’s labour market and wider economy at a critical time.”
APSCo called on the government to delay the rollout of the changes to give businesses time to adapt.
“We at APSCo maintain that it is crucial that implementation is delayed for at least 12 months after the publication of the final legislation so ‘success’ of the public sector rollout can be assessed and businesses have enough time to react to the changes.”
She recommended that employers focus on upskilling workers and reviewing IT systems, in order to make informed decisions about their status.
“Businesses will need to upskill their workforces to be able to make appropriate status determinations and they will need time to get their internal processes and IT systems in order, to cope with the new rules.”
Bowers said she that hopes the Treasury will reconsider the “damaging” plans.
“We remain hopeful that HMT and HMRC have the good sense to consider, and take heed of, the advice offered in consultation responses from those who know what’s happening on the ground. To ignore such insights would be irresponsible and damaging.”
These plans also come as Esther McVey, secretary of state for work and pensions, said that some people in the UK will be worse off under the universal credit benefit system.