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IR35 Reforms; The Need for Simplification

Tuesday, December 11, 2018

IR35 was introduced back in 2000. It’s a tax legislation designed to combat tax avoidance by contractual workers, within sector such as IT or construction, who fill a permanent position, but who don’t pay the corresponding Income Tax and National Insurance Contributions (NIC) that a permanent worker would. Her Majesty’s Revenue and Customs (HMRC) refer to such workers as ‘disguised employees’.

Extending Public Sector Reform to Private Sector

With the UK government reckoning it could lose up to £1.2bn due to IR35 non-compliance, HMRC has said its “lead option” for tackling the issue is to extend its controversial public sector reform to the private sector. Yet, despite HMRC’s IR35 being in place for almost two decades, there’s still a lot of confusion surrounding the legislation, without the added confusion of extending it to the private sector.

In fact, an independent body set up with the sole aim of simplifying the tax system has declined to approve HMRC’s IR35 proposals for the public sector, saying that while it supports the need for “greater certainty and clarity” on IR35, the Revenue’s proposals “will not, overall, deliver simplification.”

In addition, the UK’s largest employers’ organisation – the CBI – also objects to the taxman’s proposals to reform IR35 in the public sector, saying that although it supported the idea of looking to improve the current and “creaking” IR35 framework, it would oppose any increase to the costs for businesses that engage contractors. Josh Hardie, deputy director-general of the CBI told ContractorUK; “Employers are currently in no better position than HMRC to identify disguised employment.”

With so many comprehensible criticisms regarding the IR35 proposals, particularly considering that HMRC recently lost an IR35 case, it’s imperative that businesses understand the importance of identifying ‘disguised employees’, predominantly so, given the potential and upcoming transferred responsibility to employers for determining the employment status of flexible workers.

The Need for Simplification in the IR35 Reforms

The recent IR35 case that HMRC lost, saw Ian Wells, a British IT contractor, win his appeal against HMRC over IR35 law, saving him a pay-back of £26k in taxes.

HMRC stated that Mr Wells’ contract should fall within the scope of IR35 because his work was not casual, as he engaged almost continuously for over 10 months, and was obliged to turn up for work each day and worked the core hours of 8am/9am until 6pm.

The tax man consequently demanded Wells pay income tax of £14,658 and National Insurance Contributions of £12,011, the figure he would have paid in taxes if he was effectively employed by the department.

The hearing of Wells vs HMRC took place last October, between 4-6th. Judge Jennifer Dean ruled that all the elements of Well's contract pointed towards him being an independent contractor and not an employee.

She said, "Looking at the overall picture and making a qualitative assessment I am satisfied that the relationship is consistent with a contract for services, not a contract of service”. Ultimately, Mr Wells won his appeal against HMRC.

Seb Maley, Qdos Contractor CEO, said: “Despite HMRC implementing and enforcing the rules, this verdict shows they can't accurately assess a contractor's IR35 status.”

Inaccurately Assessing A Contractor's IR35 Status

This recent case further proves what many others have said about the need for simplification in the IR35 reforms. With the potential for this same law being rolled out to the private sector, it’s clear to see that HMRC’s strategy requires some changes, as currently, there is no clear-cut way to determine who falls in or outside the boundary lines of IR35. That said, there is also a strong sense that whatever the contractor sector says about IR35 reform, HMRC will go ahead regardless.

In our opinion, HMRC has a long way to go before the IR35 legislation and reforms can be rolled out successfully to the private sector, so the battle against IR35 is far from over. Chaos and confusion continues to define the public sector reform, so the government would be taking a huge risk to press on and extend such changes just yet.

Need Help Ascertaining your IR35 Status?

In the meantime, to overcome the proposed reforms, full support from a professional commercial contracting accountancy firm could help…

It can be difficult to identify a local accountant or accountancy practice with experience of IR35 contracts, but it is possible. At Accountancy Partners we offer a fresh approach to commercial contracting. Should you have any questions regarding IR35, we’re happy to help. Why not contact one of friendly team at Accountancy Partners today?

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