Tax & admin · 7 April 2017

HMRC’s IR35 status tool for contractors could be enabling tax avoidance

Unpaid business taxes
An HMRC tax tool may not be fit for purpose

HMRC’s online IR35 status tool – used by contractors to determine whether they should be classed as employed or self-employed, for tax reasons – isn’t fit for purpose, and could be facilitating tax avoidance, according to new research.

As new IR35 rules, or so-called “intermediaries legislation”, comes into force in the public sector, analysis from online platform ContractorCalculater has shown that the HMRC employment status service tool regularly fails to properly classify workers, and that thousands of contractors could be inadvertently avoiding tax as a result.

The IR35 are a set of measures that affected a worker’s tax and national insurance contributions if they’re contracted to work for a customer via an intermediary. If someone works for a client through an intermediary – a partnership, a service or personal service company, or their own limited company, for example – then they may need to follow IR35 rules.

Using the results from over 550 UK contractors that have used the government’s online IR35 status tool, and based on results of testing with its own tool, the ContractorCalculater tested IR35’s accuracy.

In findings that may worry tax policy makers, the platform discovered that 29 per cent of contractors that are told by HMRC that they pass IR35, are given a fail by the status tool, with the majority of these being “really strong” fails.

Some 24 per cent of contractors that use the IR35 status tool are told by HMRC that their status is unknown, yet ContractorCalculater concluded that most contractors in this group (60 per cent) were clear passes or fails which should be more easily classified.

Roughly 3 per cent of UK contractors the HMRC tool failed should actually pass, according to the analysis, whilst the ContractorCalculater results agreed with just 4 per cent of HMRC’s calssifications overall.

Commenting on the data, ContractorCalculater’s CEO and founder, Dave Chaplin, said that the IR35 status tool couldn’t be trusted. “Given these hard statistics it is no surprise that HMRC doesn’t appear to be standing by the results of its own tool when assessing its own contractor workforce, despite saying it would.

“These figures firmly back up what agencies and providers have been telling us for months, that the HMRC tool is inadvertently facilitating tax avoidance”.

Having tested contractors with its alternative tool over a seven-year period, the ContractorCalculater asks 101 questions to contractors before providing an IR35 result. The latest update of the system, launched in February this year, has carried out some 6,049 contractor tests to date.

Chaplin added: “The market is in utter chaos, and contractors are unnecessarily abandoning government projects due to blanket rules that are being put in place because of the confusion created

“Public sector bodies are opening themselves to significant litigation risk by putting blanket policies in place. They have not taken ‘reasonable care’, as legislation dictates, and by forcing contractors into false employment the public sector opens itself up to risk.”

HMRC launches Making Tax Digital pilot in preparation for full roll-out

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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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