IR35 reform has been rolled out in the private sector, risking ‘serious harm’ to contractors
The roll-out of IR35 reform in the private sector today (6th April), has been described as a “historic moment” and one that has come at the “worst possible time” for freelancers and contractors.
IR35 reform shifts the responsibility for determining employment status for tax purposes (IR35 status) from contractors to medium and large businesses in the private sector. Small companies are exempt from the changes.
If a business decides that a contractor’s engagement is inside IR35, the fee-paying party in the supply chain is liable for deducting income tax and national insurance contributions (NICs) at source and paying this to HMRC. If the engagement falls outside the scope of IR35 then the contractor continues to be paid in gross and is responsible for their own tax.
The widely criticised IR35 rules were originally brought in by the Treasury in 2000 in a bid to tackle ‘disguised employment’ and stop contractors paying less tax.
IR35 reform undermines contractors at ‘worst possible time’
The changes, which were due to come into force last year but were delayed due to the COVID-19 pandemic, are expected to raise £3 billion by 2024 for the Treasury. But with the pandemic having hit contractors particularly hard, industry experts are concerned IR35 reform will cause “chaos” and “unnecessary damage” to the sector.
Andy Chamberlain, Director of Policy at trade body, IPSE, said: “The changes to IR35 would do serious harm to the self-employed sector at the best of times, but now they are adding drastic, unnecessary damage to the financial carnage of the pandemic – undermining the UK’s contractors at the worst possible time.
“The crucial problem with IR35 is still its complexity: in fact, it is so complex that HMRC has lost the majority of tribunals on its own legislation.”
Expert describes ‘chaos’
Chamberlain then added: “The result is clear: chaos.
“Many clients are pushing all their contractors inside IR35 – against the rules of the legislation. Many more are only engaging contractors through umbrella companies, while others are scrapping their contractor workforces altogether – just when, as the economy opens up, they will need them most.”
‘Serious doubts’ remain over HMRC’s CEST tool
“And there remain serious doubts about the CEST tool HMRC designed to supposedly cut through this complexity – above all that it still does not account for one of the crucial deciders of IR35 status: mutuality of obligation.”
In fact, since 2017, HMRC has lost seven out of the 11 cases it has taken to court over IR35 non-compliance.
With regards to the Check Employment Status for Tax (CEST) tool, the tax watchdog’s own data revealed that it was unable to deliver an IR35 determination for nearly 1 in 5 users last year – this amounted to over 188,000 indeterminate answers.
Chamberlain argued that the complexity and the controversy surrounding IR35 shows that the UK tax system is not fit for purpose for the self-employed.
Calls for ‘root and branch’ review of tax system
He said: “We are, crucially, also pushing for a root and branch review and reform of self-employed taxation in the UK.
“IR35 is not an isolated problem: it is a marker of a tax system that was not built with the self-employed in mind. It is this that has to change – to make IR35 redundant and finally make taxation fairer and simpler for the self-employed.”
Seb Maley, CEO at Qdos, added that while reform has led to fears about the future of contracting, he remains confident that this way of working will survive:
“The introduction of IR35 reform is a historic moment. It marks the culmination of years of the government chipping away at contractors, who have shown tremendous resilience and a determination to continue working this way.
“Despite IR35 reform, I am optimistic about the future of contracting. The economic climate, the changing makeup of the workforce and the growing demand for flexible, skilled and cost-efficient workers suggest contracting is here to stay in spite of these changes.”
3 Fundamental Flaws with IR35
1) The obsession with providing a Substitute. Who has ever had to provide a Substitute since the advent of Domestic Broadband? HMRC have replaced sensible questions in the original CEST tool such as:
Do you operate under a Ltd Company
Does the Ltd Company have its own Bank Account
Does the Ltd Company operate a Payroll Scheme
Replaced with can you provide a Substitute and if so does the Client agree to accept any Substitute that you offer, assuming that the Substitute passes conventional vetting. Since Broadband you would really only provide a Substitute if you had a Stroke or something. If you were in a car crash and broke both legs you would simply work from home. In time the Substitute clause will and should be classified along side asking a young lady if she planned to become pregnant.
Also the Substitute questions are non-Questions as the Client can simply terminate a Contract within 5 Days and that is their remedy for rejection of a Substitute. The CEST tool avoids the whole issue of Notice Periods.
2) The Client is under no legal obligation to justify the rejection of, nor accept a bone fide Outside of IR35 CEST result. This will prove illegal in due course. What legal precedent is there for an unrelated company, (Not a Shareholder, Not an Officer, & No Voting Rights) to take responsibility for the Tax Affairs of the Unrelated Company.
3) HMRC have not stated whether they will initiate proceedings against the Contractor first or the Client first or the Agent first. This is diluting the validity of IR35 Insurance taken out by the Contractor because the Client understandably wants to know that they are Indemnified by the IR35 Insurance policy of the Contractor. The Contractor’s IR35 Insurance Policy provides legal insurance for the Contractor only. This is causing the uncertainty.
None of these points have been tested in the Public Sector and as usual they are now being exposed by the Private Sector.
Utterly unworkable without 10 years of litigation to establish the actual rules.
Proof HMG don’t want reasonable legislation in an industry they wish to destroy.
Classic Johnson, of course we’ll keep on voting for him for his funny hair and jovial remarks … such a cad.
Seb Maley, CEO at Qdos, added that while reform has led to fears about the future of contracting, he remains confident that this way of working is here to stay:
“Despite IR35 reform, I am optimistic about the future of contracting. The economic climate, the changing makeup of the workforce and the growing demand for flexible, skilled and cost-efficient workers suggest contracting is here to stay in spite of these changes.”
Nothing to see here Seb, JUST THE DESTRUCTION OF YOUR INDUSTRY!
With industry spokesmen like Seb Maley representing us I’m totally confident there might still be a few contractors left by the end of the year.
Keep up the pressure I think we’re winning!
The laughable thing is all this drivel about “making the tax system fairer” – IR35 makes taxation for the self employed anything but.
I currently have two clients, both in Europe. Both have contacted me to bring up the off payroll rules. If either of them decide to mitigate risk and place my engagement *inside* it’s likely I’ll lose them as a client. Why? Because this legislation prevents me from running *my business* as a business – how should I pay for admin costs, overheads, training, computer equipment, and should the pandemic ever abate travel and accommodation ?. My daily rate is unlikely to change much in the event of an inside determination – so I would need to pay for these things out of my net pay – imagine asking an employee to buy their own printer, or pay for their own frequent training courses, or their travel costs etc.
It’s a farce and the only winners will be big consultancies and offshore companies like Infosys (cheers Rishi!) Who are exempt from these changes despite operating in exactly the same way we do, but with more staff and better accountants. I await the spin they will put on this when the figures are in and they realise they net *less* tax revenue through this than the previous model.
“Small companies are exempt from the changes.”
For now.
Companies with 50 employees or fewer don’t tend to be able to pay the rates of experienced contractors. It’s an irrelevance.
I was a contractor until a couple of years ago and I saw far too many contractors taking the mickey with tax.
Minimum wage and the rest as dividends for them and their partner (who brings nothing into the ltd company). The writing was on the wall for a long time, then in legislation and now it’s been implemented people are moaning. Maybe if the greed and comical interpretation of taxation of some contractors had been dealt with earlier the legitimate contractors wouldn’t be hit now.
You are the imposter.
You have been ejected.
I worked with contractors years ago and became incredibly resentful after comparing their gross invoice unfavourably with my take home pay.
I’ve been seething for years because I wasn’t dedicated or proficient enough to join them. Without privy to their tax returns I’ve had to make up their remuneration story in my head egged on by fabrications from the Ministry of Truth.
Now as an early retiree on a huge final salary pension I pay very little tax and no national insurance but am glad to see the Ministry of Plenty clamping down on these odious tax cheats.
I agree with Mark, unfortunately those really taking the piss, the internationals and MDs of large companies getting share option don’t seem to have the writing on their wall.
That’s because you are Mark.
I have had IR35 forced on me so i have gone permanent, another quality candidate that this bullshit country no longer benefits from.
I’ve seen contractors turn up for work with fresh broken bones. Also seen permies call in because their cats been sick.
I hope you are making the most of your new employment status.
British workers are “among the worst idlers in the world. Too many people in Britain prefer a lie-in to hard work” – Liz Truss, Dominic Raab, Priti Patel, Chris Skidmore and Kwasi Kwarteng. Britannia Unchained
Going to a PAYE status on way or another is exactly what they wanted you to do.
They don’t think “total tax take”, just percentages.
Mark – In respect of your “Take the Mickey” observation, you made no mention of Corporation Tax nor Dividend Tax. Dividends can only be declared and paid on Current Year or Prior Year Profits. Profits that were inside the scope of Corporation Tax @ (19%). The Dividends would then incur an additional Dividend Tax @ (7%) up to £50k, more thereafter.
I also noted that you made no mention of down time between Contracts where no income is quite common. Hence a modest Risk Premium to reflect the “Contractor Risk” exposed on Contractor’s. IR35 is increasing this Risk by making Offshoring more conducive. Excellent for Infosys.
The “Take the Mickey” quip is disingenuous but hardly original. It’s precisely this floored thinking that is behind IR35 and HMRC. Full of factual omissions and peppered with selective factual recall; lacking any credibility after scrutiny.
And…
Once you submit your self-assess tax return, HMRC will extrapoltae a gross salary, clac the tax due (all bands) and send a demand for the difference between tax due and tax paid to date.
There’s no gain from dividends, it’s a piece of utter nonsense inspired by brainless “journalists” aka “political activists” who don’t understand, they just feed the green-eyed monster as clickbait.
The “experts” and “representatives” have always had a vested interest in IR35 continuing, right down to the useless PCG, IPSE or whatever they call themselves this week.
First they failed to win the judicial review. Then they refused to take it to the EU courts (where Lunn Poly won on the insurance premium tax issue on grounds of “proportionality”). Then they demanded “certainty” – and they got it. All along, they were told “If you demand certainty, the certainty yo get is that you’re all caught”. And that’s what they got.
Now, if you look at their latest daft comments, they are talking about “chaos”. Wrong focus again. The issue is PROPORTIONALITY – other self-employed workers and other industries do not have to pay employers NI, employees NI and all the tax bands on their income. That issue should have been the focus all along.
In fact, if Employers NI were removed from the taxation system, IR35 would be largely irrelevant. What’s left is that ability to claim expenses and retain profits in a Ltd Co, which is not a massive advantage and quite reasonable given contractors’ circumstances.
As a newly inside IR35 contractor and paying the same taxes as staff, will I receive holiday pay, sick pay, a company pension, severance pay and employment rights? Er, no!
Would a staffer accept having to pay his/her own travel and accommodation when working away from home? Er, no!
Would a staffer accept losing every Friday and Sunday afternoons to a long (unpaid) drive? Er, no!
So much for a level playing field!
Move your bank account to a financial institution that DOES IR35 properly
This is the only thing we can do
Look at who you use in all walks and adjust your stance.
@Bored, that’s the worst financial advice I’ve ever read. Do you advise on pensions as well? are you on drugs? Do they let you near sharp tools?
Bored- You clearly don’t get the point. Since 6th April 2021 the Contractor has no Control on deciding whether they are Outside or Inside the scope of IR35; it’s solely the decision of the Engaging Client. As a Contractor you can pass the CEST Tool Test and be declared Outside of IR35 but the Engaging Client can ignore the ruling. HMRC will never pursue a Client for incorrectly making an Inside IR35 decision, but will pursue a Client for making an incorrect Outside of IR35 decision.
Fortunately for many of us Old Skool Contractor’s we aren’t Bored as the phone is ringing constantly as Agents are finding difficulty finding Temps.
You carry on being Bored and keep swapping Bank Accounts. A Financial Asset doesn’t suddenly disappear from the Balance Sheet because you switch Clearing Bank.
Not sure that technique will survive an HMRC investigation; best of luck with that financial strategy aka as False Accounting.