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'Tax crackdown on the self-employed has cost me £1,000 a month – and it will only get worse'

Sam Meadows
Frank Garofalo estimates he has lost out on up to £2,000 a month of income following a set of tax reforms - Paul Grover for the Telegraph

Contractors who until April were able to control their own tax returns are discovering their incomes are falling because their employers are now electing to tax them under a more penal regime.

And while this has so far implicated only those working for public sector employers, it is being mooted to spread across all employers including those in the private sector.

The little-known tax legislation governing “off-payroll working”, known as IR35, was changed in April, requiring public sector hiring organisations - such as the BBC and the NHS - to determine whether a worker fell inside the rules. This led many organisations to opt for a more cautious interpretation of the rules, fearing punishment from HM Revenue & Customs.

If it’s determined the contractor does fall inside IR35, they will be taxed as employees – usually a higher rate than they had been paying before – and cannot claim many expenses such as accommodation in the same way they had before.

Contractors complain this is unfair as they do not get many of the same rights as full employees, including holiday pay and sick pay.

Bound up in the small print of last month’s Budget was a statement that IR35 reform has “improved compliance” in the public sector and the intention is now to extend it further. An evidence paper will be published in 2018.

Frank Garofalo, 52, has worked as a cost-cutting consultant for several huge multinational companies including Europcar and WHSmiths. More recently he has worked for a number of local authorities and says that the changes to IR35 have cost him between £1,000 and £2,000 a month.

In the past he had viewed his circumstances as falling outside the IR35 rules - and his returns were never disputed. But his public sector employers have now taken a different view.

“All of a sudden I had the costs of running a limited company, but also lost national insurance benefits, all the travel benefits and other expenses, and I got nothing in return,” he said.

“I still don’t get holiday pay or sick pay, or a pension. A lot of people I know have just moved away from local government entirely.”

self employed

HMRC acknowledged concerns over employment rights for the self-employed and said it was in the process of publishing a consultation into employment status. But a spokesman said that employment status and taxation are separate issues.

Research by Contractor Calculator, a website providing support for contractors, suggests this has had a serious knock on effect. According to the site, 76pc of public departments lost “highly-skilled” contractors after the reforms went live and as many as 70pc of projects were delayed and cancelled.

A survey of NHS locum staff also found that 60pc of locums had been classified as within IR35 and one in four had ceased working for the NHS altogether following the change.

Grant Speed, of Odgers Interim, an employment agency, said the “complicated” system had created confusion among contractors and had led to a “brain drain” from the public sector.

He explained: “I am all for people paying the right amount of tax, but interims have a significant lack of benefits compared to employees. I think the amount they contribute to the economy needs to be taken into account.”

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He did praise the Government’s “cautious” approach to private sector reform, however, saying a consultation was the correct route forward.

HMRC estimates that “non-compliance” in the private sector will cost taxpayers £1.2bn by 2022. A spokesman said: “The government will carefully consult on how to tackle non-compliance with the off-payroll working rules in the private sector, to ensure individuals who work like employees are taxed like employees, even if they work through their own company.

“This consultation will draw on the experience of recent reform in the public sector, including through external research already commissioned by the government and due to be published in 2018, and take account of the needs of businesses and individuals who would implement any change.”