Tax & admin · 28 September 2017

Trust in IR35 tool plummets as contractors urge HMRC to ditch reforms

HMRC Tax return
Over 60 per cent of contractors refuse to work in the public sector because of IR35 rules

Just ten per cent of UK contractors now use HMRC’s IR35 tool to clarify their working status, as faith in the government’s service to deliver correct results has all but disappeared.

The proportion of contractors found to be using the IR35 tool has dropped from 28 per cent since it was introduced alongside new working status legislation in April this year.

According to the results of a survey carried out by contracting site Contractor Calculator amongst 6,000 UK contractors, just 1,100 contractors claimed they’d used the IR35 tool since it was introduced.

Some 25 per cent who do use the tool reported being given a “IR35 does not apply” result upon using the IR35 tool, even when those contractors believed IR35 rules should definitely apply to them.

Around 24 per cent received an “unknown” result from the IR35 tool, of which analysis from Contractor Calculator predicted that two thirds would firmly be inside or outside HMRC’s IR35 rules, but that the IR35 tool could not probably determine the status of those contractors.

Most surprisingly, the survey found that 45 per cent of the contractors who received a “IR35 does not apply” result had been given it based on “substitution”, and had not had other factors taken into account. At least 25 per cent of contractors given a “does not apply” result by HMRC, and passing substitution, were actually found by Contract Calculator to be caught by IR35 rules.

The founder at Contractor Calculator, Dave Chaplin, commented: “Substitution is very rare in the contracting market so for HMRC to pass 45 per cent of contractors based solely on substitution without considering other factors is not only contrary to how status is tested in the courts, but also in stark contrast to the reality of the working practices with most contractors.”

IR35 rules were first introduced in 2000 to combat “disguised employment”, where businesses hired workers through an intermediary company. By using the corporate structure of an intermediary, individual workers were able to pay less income tax and national insurance contributions (NICs) than they would have done as a fully-fledged employee.

Since the business engaging the intermediary company was not required to operate a PAYE scheme and make NICs, IR35 rules allowed HMRC to look past the intermediary and demand PAYE and NICs in cases of disguised employment.

Originally named the Employment Status Service (ESS), HMRC’s service was subsequently dubbed Check Employment Status for Tax (CEST) before being renamed IR35.

Chaplin added: “The roll out of the IR35 reforms was underpinned by the promises made by HMRC that their CEST tool would provide public sector hirers, agencies and contractors with certainty. But clearly people have now lost faith in the tool.

“We know that 61 per cent of contractors have turned their backs on the public sector because they refuse to work under IR35 off-payroll rules and now contractors have turned their backs on using the tool that HMRC built to underpin its reforms.

“The damage has been done, chaos has ensued and now the tool is hardly being used. We would therefore urge HMRC to ditch the reforms altogether and conduct a proper investigation into what has happened. HMRC must now surely acknowledge that it is not well positioned to roll out the reforms to the private sector.”

The government expected April’s latest IR35 rule updates to yield an extra £185m during the 2017/18 tax year due to uncovering disguised employment.

Read more: Contractors accuse HMRC of giving incorrect IR35 advice

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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