The government tax agency, HMRC, are proposing some changes which could seriously discourage bigger businesses from using freelancers, contractors and small businesses. On behalf of the microbusiness sector we’ve just made submissions to two recent consultations on these potential changes.

Our thoughts on HMRC’s IR35 proposals

The first was a discussion document from HMRC on how IR35 rules might be simplified and made more effective. We think the rules are currently too complex, creating an unfair burden on micro-businesses including freelancers and contractors. We’ve suggested to HMRC that three simple tests are used for determining IR35 status in future:

  • Personal Service – Can someone else do the work?
  • Control – Does the engager (your clients) control how the work is done?
  • Mutuality of obligation – Can either party walk away from the engagement?

One proposal explored in the HMRC document is that engagers should bear liability and responsibility for whether someone should have IR35 applied. While such a move would make enforcement easier for HMRC, we oppose it as it is likely to have a chilling effect on corporates hiring freelancers and contractors.

We fear that if this change was applied some firms will seek to avoid the risk of IR35 liability by picking larger suppliers and professional services companies to the detriment of the many skilled and creative micro-businesses in the market.

Changes to travel and subsistence expenses rules

On this issue HMRC are consulting for the second time around. HMRC’s focus is on umbrella companies who are inappropriately encouraging workers to claim for travel and subsistence expenses as a way to boost their take-home pay.

Feedback from a previous consultation encouraged HMRC to broaden the scope of the changes for fear that otherwise workers would simply switch from umbrella companies to personal service companies to keep claiming such expenses.

We accept the clear fairness argument that if someone is effectively the same as an employee then they shouldn’t be able to claim expenses to their usual place of work, as PAYE employees wouldn’t be able to do so. The proposals shouldn’t affect genuine freelancers, contractors and small businesses who are serving their clients.

Our concerns are that the proposals would not have tests that are aligned with the IR35 tests. We believe a single set of consistent tests for both IR35 and these expenses restrictions would be best.

As with their IR35 consultation, HMRC have sought views on making the engagers liable for the correct implementation of these rules. We believe this will disadvantage micro-businesses from winning work as larger firms seek to minimise risk and complexity. If a particular type of organisation is encouraging abuse of a rule, then they should be targeted, not the whole sector nor their clients.

Would these proposals benefit your business? Let us know what you think in the comments below.

View our full consultation submissions here for expenses [PDF] and here for IR35 [PDF].

PS. Our partners Abbey Tax have come to similar conclusions with their submissions.

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