IR35: Contractors unhappy with HMRC’s progress

15th March, 2019
IR35: Contractors unhappy with HMRC’s progress

Research carried out by independent bodies suggests that one in five current UK contractors think they will be forced to leave contracting for a permanent role post-April 2020. This is when IR35 reforms are set to be rolled out to the private sector. The reforms, which mirror those introduced to the public sector last April, transfer the responsibility for determining employment status from the contractor to the end client. Responsibility for deducting income tax, NICs and paying any employer NICs will rest with the organisation paying the contractor’s fees (usually the agency or umbrella company). Eight out of ten contractors believe that businesses won’t understand how to implement the new rules effectively in the private sector, while 62% are concerned that blanket IR35 applications will occur leaving them disadvantaged.

Despite the negative impact the changes had on the public sector when they were implemented last year, HMRC shows no measurable sign of addressing the issues raised. Although they claim that they’re focusing on reform, HMRC actually appear to be increasing their tax avoidance activity. The recent ‘fishing letters fiasco’ was lambasted by tax experts as a deliberate attempt to dupe contractors, while the BBC scandal culminated in the broadcasting corporation placing the blame with CEST’s inadequacy.

Although HMRC has stated that CEST improvements are underway and draft legislation is expected in the summer, there have already been two IR35 tribunals this year. Both tribunals found in favour of the contractors and highlighted issues around HMRC’s internal operations. Owing to staffing oversights, HMRC had failed to respond to information that they requested from a contractor, which resulted in a complaint.

HMRC’s focus on increasing their tax revenue is increasingly worrying. The off-payroll rules threaten a colossal reduction in workforce mobility and access to key skills, in addition to substantial administrative burdens for those required to assess income for contractors.

In the last IR35 Forum on 21st November 2018, concerns over blanket rulings in the private sector were met with something close to justification from HMRC, who responded: “An engager may consider that identical facts and terms and conditions apply to other contracts. And it is then not necessary to review every individual engagement separately.” Although the off-payroll consultation published on March 5th clarified that the circumstances of each contract should be taken into consideration, HMRC steadfastly maintained that they had seen little evidence of blanket rulings in the public sector. The case will not be the same in the Private Sector where uniformed duties are not in such evidence.

Forum members also raised the much-needed alignment of employment rights and tax, which was highlighted as a major area of concern by the Good Work Plan. The discrepancy finds contractors inside IR35 unable to claim employment rights, despite being considered ‘employed for tax purposes’ and paying the same tax as employees. In repose to this, HMRC advised that this is a longer-term issue and that “there is an immediate need to tackle private sector non-compliance with the off-payroll rules which results in substantial costs to the Exchequer.” Subsequently, the consultation document also defers on this issue, while seeking to improve compliance by stating that responsibility for tax and NICs will lie with the last UK-based fee payer in the chain.

The consultation document also clarifies that the responsibility for determining IR35 rests with the client, instead of being passed down the supply chain to the agency. The client must communicate this decision directly to the contractor, giving reasons for their determination where necessary. Although this seeks to improve the effective sharing of information, unless drastic improvements are made to CEST, the client will still have to use the same inadequate tools to reach their decision.

The document states that where the client and contractor are in disagreement about the employment status, a client-led disagreement procedure should be put in place. Although the document suggests that this will mean that more workers and clients will reach the correct IR35 position in real time, in reality, this shifts even more administrative burden onto the client, while placing the contractor at a considerable disadvantage.

The IR35 landscape looks increasingly bleak for all parties. With the 5% expenses claim set to go in line with public sector reforms, contractors face the unappealing prospect of excessive taxation compounded by reduced tax relief for professional advice. Meanwhile, hiring firms face the daunting prospect of HMRC taking action if their application of IR35 is questioned, while also incurring a 12% increase in the cost of hiring the services of a contractor.

The consultation document is already under fire from critics who are accusing the government of damaging the contracting sector and UK businesses. There’s concern that the new rules could result in a rapid build-up of uncertain tax risk on a company’s balance sheet, equivalent to 50% of their annual cost of hiring contingent workers. A summary of the responses to the consultation will be published later this year.

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