Section 70 Finance Act 2011 - Financial Freedom

Section 70 of the Finance Act 2011, enacted in the United Kingdom, introduced significant changes regarding the taxation of disguised employment. Its primary aim was to combat tax avoidance schemes that allowed individuals to be treated as self-employed contractors for tax purposes, even when they were effectively working as employees for a single client.

The core issue Section 70 addressed was the use of intermediaries, often personal service companies (PSCs), between the worker and the end-client. These intermediaries would receive payment from the client for the worker’s services, and then pay the worker either a salary or dividends. The dividend route offered significant tax advantages, as dividends were taxed at a lower rate than employment income and were not subject to National Insurance contributions. This arrangement effectively reduced the overall tax burden for both the worker and potentially the client (by avoiding employer’s National Insurance).

Prior to Section 70, the existing IR35 legislation (introduced in 2000) attempted to address this issue. However, IR35 placed the onus on the individual worker operating through the PSC to determine whether their engagement fell within the scope of the legislation. This proved complex and difficult to enforce, leading to widespread non-compliance and ongoing tax losses. Many workers were either unaware of IR35 or deliberately avoided complying with it, leading to a considerable “tax gap”.

Section 70 introduced a key change: it shifted the responsibility for determining IR35 status from the worker to the public sector client. If the client determined that the engagement was one where the worker would have been an employee had they been engaged directly, they were then required to deduct income tax and National Insurance contributions from the payments made to the intermediary. This effectively treated the payment as employment income.

This shift in responsibility was intended to improve compliance by placing the burden on larger, better-resourced organizations within the public sector. These organizations were deemed to be better equipped to assess employment status and to handle the administrative burden of deducting and remitting the correct taxes.

The legislation defined “public authorities” broadly, including government departments, local authorities, NHS bodies, and other publicly funded organizations. This ensured wide coverage and aimed to address the problem across a significant portion of the economy where disguised employment was prevalent.

Section 70 significantly impacted the contracting landscape. It led to increased compliance with IR35 regulations within the public sector and resulted in a rise in the number of contractors being treated as employees for tax purposes. While it increased tax revenue for the government, it also led to some controversy, with some contractors arguing that it unfairly penalized them and reduced their take-home pay. Furthermore, organizations faced challenges in accurately assessing employment status, leading to inconsistent application of the rules in some cases.

Following its implementation in the public sector, the principles of Section 70 were later extended to the private sector in 2021, further expanding the scope of these rules and their impact on the UK’s contracting industry. The 2011 legislation laid the groundwork for these later changes, demonstrating its long-term significance in shaping the taxation of contingent labor in the UK.