During the Budget 2018, the UK Government had announced extension of the controversial IR35 rules to the private sector. The said rule will be implemented in April 2020 and will be applicable to medium and large sized private businesses.

Professional bodies that represent self-employed workers and contractors have severely criticised the Government’s decision to extend off-payroll working rules to the private sector.

Recently, a body of the Chartered Institute of Taxation —  the Low Incomes Tax Reform Group (LITRG) — has also raised voices against the Government’s plan.

How IR35 Reform Could Impact Low Paid Workers

Many low-paid temp workers in the UK are able to find work through employment agencies only if they form their own companies. Employers contact these workers because they could avoid paying employer’s National Insurance Compensation (NIC). Moreover, they don’t have to pay the employment privileges to these workers.

Some employers also earn additional income by offering accounting services to individuals.

However, the new tax rules would seriously hurt the employment model that benefits both the worker and the private business. This could result in most low-paid workers facing a messy litigation as they don’t have knowledge about how to keep the company’s affairs separate from their own.

The Head of LITRG, Victoria Todd, says that while the Government has done the right thing by exempting small businesses from IR35 reform rules, the low paid workers who offer services to medium and large companies would be seriously affected. She also says that this could result in an end of the practice of providing services through personal service companies.

The closure of personal service companies could affect a large number of self-employed individuals. The Government will have to carefully consider the response for such an anomaly.

According to Ms. Todd, if we are to learn from the implementation of IR35 reform in the public sector, we could see increased shady practices in the private sector to avoid taxation. Apart from workers, engagers might also be forced to take an alternate approach to avoid paying higher taxes.

The end result will be lower taxes for the Government instead of an increase in tax revenues.

On a side note, Ms. Todd did appreciate that the HM Revenue and Customs (HMRC) commitment to perform historical enquiries. While the intention is laudatory, she raised doubts whether the Government tax agency would keep true to its words given the attitude of its officers relating to the off-payroll working rules.