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Contractors were wrongly classifying themselves as outside the tax regulations in 90 per cent of cases, writes HMRC’s Jim Harra
Too many contractors who should be abiding by the employment intermediary rules (IR35) have been paying less tax than they owe, denying the country hundreds of millions of pounds for schools, hospitals and other public services.
Many have been working alongside public sector employees for years, working on the same projects, but have been paid differently because they have been providing their services through their own limited company and applying the employment intermediary rules incorrectly.
The rules are designed to ensure that when a contractor who is engaged through their own limited company has a relationship with the engager that mirrors an employer-employee relationship, the same tax should be paid as if Pay As You Earn applied. But this has rarely happened. HMRC estimates that contractors were wrongly classifying themselves as outside the rules in around 90 per cent of cases. Mostly this was because contractors, rather than employers or agencies, were deciding whether they should be subject to the intermediary rules.
That is why, in April, new rules shifted responsibility for making the decision from contractors to the public body or agency employing them. No longer do contractors working in the public sector decide whether the rules apply to them. Since then, we’ve seen more jobs being classified as within the intermediary rules, ensuring that many more people are complying with the law and, importantly, paying the right amount of tax.
We’ve been accused of changing the rules: that is simply not true. The underlying rules about whether or not someone is employed or self-employed, and whether the intermediary rules apply, have not changed. The reforms simply moved responsibility for deciding whether a contractor should be working within the rules from contractors to the employer.
There has been a great deal of misinformation in some sections of the media about the changes to the employment intermediary rules, including suggestions that there would be a mass exodus of contractors from the public sector. This has not happened. HMRC has been monitoring this. Contractors come and go, and the market is naturally fluid, but it would be wrong to suggest that the public sector has significant recruitment gaps because of this reform.
Another misconception is that public bodies are now ruling every job inside the intermediary rules as a matter of course. This is not true. Public bodies have a decision to make, and HMRC is helping them with this. We have provided an online tool called the check employment status for tax (CEST) service. It asks the kind of questions that a tax inspector might ask a contractor when determining their tax status. We worked closely with public bodies and contractors to design it and tested it extensively, and our lawyers matched its responses against case law to ensure responses were in line with previous tribunal decisions.
In just four months, the CEST service has been used more than 450,000 times and most public sector bodies are using it routinely.
CEST provides a conclusive result in 85 per cent of cases, and HMRC has agreed to stand by the advice it provides, as long as it is based on the correct information and our guidance has been followed. CEST is also fast, providing a response within minutes; during its design, customers highlighted speed as a primary concern.
In the cases where CEST cannot provide a result, which is usually because they involve particularly complex situations, we have more detailed guidance and specialist advisers on hand to help public bodies and agencies make the correct decision.
Importantly for employers, CEST is the only tool that HMRC recognises. Alternative products being marketed may not be helpful. A wrong result will lead to extra administration for employers and contractors could find themselves facing penalties and interest, on top of the correct tax that they should have been paying. We strongly advise employers and agencies to use CEST.
Contractors and others who stand to lose out financially have spread a great deal of misinformation about the consequences of the reform. While it will be some time before we can fully evaluate its impact, we believe it is driving up compliance with the rules, contributing to a fairer employment marketplace for everyone.
Jim Harra is HMRC’s tax assurance commissioner and director general for customer strategy and tax design
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If the IR35 rules are to establish a fair tax payment then is it not correct for the employer/employing agent pay the employer national insurance contribution and not subtract it from the offered dayrate? If it is subtracted from the advertised rate is this not breaking the employer/employee contract, as when a staff position is advertised with a salary figure it does not cut the employer NI contributions from the offered salary figure, dies it?
This article contradicts all the information and feedback received on ContractorUK - notably feedback from those working in the Public Sector and Recruitment Agencies that are struggling to fill Public Sector roles. The overall impact on Public Sector projects, increased cost of delivery and skills within the Public Sector will offset any potential increase in tax receipts. This is not discussed in the article. See Reference: http://www.contractoruk.com/news/0013203hmrc_accused_peddling_ir35_propaganda.html
"Contractors and others who stand to lose out financially have spread a great deal of misinformation about the consequences of the reform."
I don't know whether to laugh or cry, Jim. Your article is full of misinformation.
Let's start with the opener - the 90% figure - "Contractors were wrongly classifying themselves as outside the tax regulations in 90 per cent of cases". This one has been doing the rounds for a while - the actual statement (unsupported by evidence) from the consultation document was that "The government estimates only one in ten PSCs who should be operating the rules on at least part of their income are doing so." The only way your opening line could be true, is if 100% of contractors should be IR35 caught. Much as HMRC would like that to be the case, it clearly isn't.
Then we have "The reforms simply moved responsibility for deciding whether a contractor should be working within the rules from contractors to the employer." They also shifted liability to the fee payer, removed the 5% expenses allowance and made it extremely difficult to make 'employer' pension contributions, because the client is not, as your wording implies, the employer - that duty remains with the contractor's limited company.
"our lawyers matched its responses against case law to ensure responses were in line with previous tribunal decisions". Which version of the tool was in line with tribunal decisions? Was it that one that didn't allow laptops to be counted as equipment? Was it the one the said the client must accept a substitute in every situation even if it negatively impacts the work? Please could you provide links to the tribunal decisions that support these assertions?
You are of course correct that not all public sector bodies are applying blanket decisions, but some are. Some have made blanket decisions, then changed their minds, then reverted to blanket decisions again. Not all projects have been affected, but some certainly have.
"Contractors could find themselves facing penalties and interest, on top of the correct tax they should be paying." More misinformation - the change moves liability to the fee payer - liability for a decision that they are not responsible for.
Yes, of course contractors are worried about the consequences of the reform. But it's not the contractors who are spreading misinformation.
I'm sorry but this is total rubbish. HMRC saw an opertunity to circumvent case law knowing that the people affected would not be able to question you. I'm happy that I run my business To call it underhand doesn't really do it justice. The fact the CEST gives inaccurate results based on case law says it all really. It's obvious on the coal face what this has done with services struggling even more than they were already!
There are a myriad of things that are morally wrong with IR35. However, based on the correspondence I receive, by far the worst is that lack of a link between taxation status and employment status. In a fair and democratic society, how can it be right that the government can regard a contractor as an employee for taxation purposes but not grant them any of the employment rights of an employee. So as a contractor- you will be taxed as an employee but you get no sick pay, no holiday pay, you pay for your own insurance (professional and public liability), no notice period, no guaranteed work period and so on.
I ask anyone reading this to stand back and just think how anyone could possibly regard the current arrangement of IR35 as fair or equitable. If you agree, please lend your support to our campaign either via Contractor Calculator, IPSE, IIM or by contacting me via LinkedIn.
When the government did their review in 2015, link below, they found that "95% of government departments were broadly compliant in ensuring that their contractors provided satisfactory assurance that their tax affairs were in order" - so what has changed that HMRC have gone from 95% compliance to 90% failure in the past two years? Doublespeak? Shifting goalposts? Complete chaos?
This measure, juts like the original IR35, was hastily cobbled together by people with little or no real experience of the contract market and who constantly deny themselves the opportunity to learn by consultation. The recent IR35 Forum minutes exclude the reality of what was actually said in the meeting by anyone other than HMRC!
Rather than demonising contractors, how about consider action against organisations (both public and private) who actively recruit contractors into long term roles in order to avoid having headcount on their books, along with the associated costs. Contractors are explicitly told they cannot be 'self-employed' because the risk is too great to the end client. The risk being that the end client becomes liable for any taxation. So, they have to use an umbrella service or incorporate. CEST is not based on case law. It is based on what HMRC want the law to be. If it determines a role as inside IR35 then surely that means the PSB is engaging an off payroll worker in order to evade the taxes due by not employing that person. In that case, the contractor should be offered employment, with full benefits. However, HMRC say that employment status is not the same as tax status. Highly convenient for ensuring the worse of both worlds for the contractor.
I am all for paying the right amount of tax. The right amount of tax takes into account the risks I take by not being employed. The right amount of tax considers that I have to pay for my own training (only in the job I already do, there's no CT relief if I want to expand my services into a new area of expertise), my own pension, insurances, holiday and sick leave, maternity/paternity leave and pay, etc. etc. HMRC and HMG won't tackle the big businesses who evade their tax responsibilities to the tune of billions. It's easier to erode the flexible workforce, the one man bands who face losing their homes rather than a shareholder vote.
During our IR35 surveys on ContractorCalculator we heard from many workers in the special needs sector deciding to leave after decades of experience, simply because it was no longer commercially viable for them to work due to the huge reduction in take home pay because of these reforms. They said the result would simply be that disabled children would not get the care they needed.
Mr Harra might like to consider about all those families that have suffered when he pops his head on the pillow every night.
What an appalling and disgraceful misrepresentation of the truth. By their own admission, HMRC have gathered no information about the impact of IR35. The real facts are shown by the results of the survey undertaken by Contractor Calculator and as published on their website.
HMRC stand accused of misrepresenting the truth in their version of the minutes of the IR35 consultation group. At every turn, HMRC have - at best - misrepresented the truth.
The fact is that IR35 has caused untold damage to our public sector causing critical projects to be delayed, cancelled or incurring vastly additional cost.
It has resulted in critical health workers who used to be able to bolster their meagre pay by doing additional shifts via agencies leaving the NHS in their droves.
The actual truth is that IR35 is causing abject pain to thousands of averagely paid individuals, and untold long-term damage to our public services.
We have the outcomes of the contractor calculator survey which demonstrates the FACTS about the impact of IR35. I challenge HMRC to produce empirical facts to substantiate their claims. They can’t because their claims are misleading and untrue.
It is good to hear from HRMC on this important subject but one thing not mentioned by Mr Harra was that HRMC told Public Sector bodies that they could be fined £20,000 per person who was later found to have not been categorised correctly.
I know of one Government Department that had 90 fee earners who were paid gross as the majority did not work via any service companies but guess what? All 90 were regarded as as being within the IR35 coverage. Despite what HRMC may say, the fact that that public sector body could have been fined close to £2m must have played a role in their decision-how could it not do so?
The impact- myself and another 45 people have stopped working as it was not worth working with what is a 30% reduction (tax and NI) and in the end, the service badly needed is now overloaded.
It is quite shameful!