Contractors hit by changes to the tax rules under IR35 could be entitled to
employee benefits and protection, a legal expert in the field has warned.
The changes, adopted in April under the Finance Act 2000, are designed to
prevent workers avoiding tax by setting up as personal service companies. Those
deemed by the Inland Revenue not to be genuinely self-employed will be forced
to pay the same tax and National Insurance contributions as employees.
Some of those affected are already trying to recoup losses in income of up
to 20 per cent by demanding extra benefits such as sickness and holiday pay, or
higher gross pay, even though the full effects will not be felt until next
"It is a threat that should be taken seriously," said Kevin Barrow
of law firm Tarlo Lyons. "The tests that dictate whether someone is within
IR35 are in effect the same as those applied by the courts to decide if someone
is an employee," Barrow said.
In some cases, contractors have threatened to fight test claims of unfair
dismissal unless users agreed to offset the effects of IR35, he added.
Barrow also warned employers to be wary of amending contracts to help people
avoid the new rules. "Unless there are genuine changes to the way those
people carry out their work, many of these changes will not be valid," he
"Not only could this be a criminal offence – conspiring to defraud the
Revenue – it could make large users of contractors ripe for investigation by
Inspectors could be entitled to claim up to seven years of back tax and
National Insurance, he added.