HMRC closes in on IR35 abusers
As the post-Summer Budget dust starts to settle, there is a hotly debated topic still keeping contractors awake at night. Last week I started to look at the proposed changes to dividend tax, which form part of a series of wider reforms to the Intermediaries Legislation, commonly known as IR35.
The publication of HMRC’s IR35 discussion document in July has triggered a growing sense of unease amongst the contractor community. The big concern is that these latest attempts to achieve clarity will only serve to move the onus of declaring a worker’s status from the worker themselves, to the reluctant client.
The story so far
In order to get on board with the so-called “Rationale for Change”, it is important to first understand the current situation…
Under the current ways of trading with a client, self-employed workers have been able to use employment intermediaries such as Umbrella companies, employment businesses and Personal Service Companies (PSCs) as a way to reduce their tax and National Insurance payments.
As a result, people pay different levels of tax depending on whether they are employees, self-employed, or work through their own Limited Company.
An example of this is a contractor being able to claim tax relief for travel and subsistence costs to and from their usual place of work, whereas an employed worker doing exactly the same job would have to grin and bear it with no tax reliew for themselves. It is this disparity that the Chancellor, George Osborne, wants to even out.
Who is at risk?
Most contractors are operating fairly and squarely through these employment intermediaries and have legitimate and justifiable reasons for working through a Limited Company, such a the protection of limited liability, greater flexibility and long-term planning options. However, some are taking unfair advantage of the system and it is these “abusers” that the Chancellor has set his sights on catching.
In my view, anything that helps police the industry more effectively and “level the playing field” so it is fair to all, is a good thing. By tightening the noose on IR35 abusers, the Chancellor is paving the way for legitimate PSCs to get on with what they do best and being recognised for the valuable contribution they make to the UK’s flexible workforce.
Understandably the fear is that, rather like trawling the ocean to catch a few naughty fish hiding in the shadows, many compliant businesses will be caught up in the new measures designed to better fill the Treasury’s coffers. The other contentious matter is introducing the concept of “fairness” to a moral and ethical debate. How can ‘fair’ be anything other than subjective?
As you can see, the situation is not as clear cut as HMRC would like us to think. The Treasury’s promise to the Chancellor that the IR35 reforms could help raise an additional £430 million is, in the view of many commentators, unrealistic.
There may be trouble ahead
A key flaw in the discussion document’s suggestion is the proposal of putting the responsibility of assessing a contractor’s IR35 status onto the engager. This is likely to cause a serious headache for UK employers. Why does HMRC think engagers will be any more accurate in doing this than the worker, unless it is accompanied by transfer of debt provisions?
To me, this is where the reforms start to unravel. Is the tax man seriously expecting people to put up their hands and declare, “I am Spartacus!”?
The current guidance for identifying “supervision, direction or control” [see ESM2029 for examples] to help assess the worker’s tax status is, in itself, entirely based on hypothetical examples and open to misinterpretation in the real world. This is a subject I will be exploring in more detail on the Intouch blog over the coming weeks.
The constant challenge for HMRC is deciding who should, or should not, be either side of the IR35 dividing line. In an ideal world, HMRC would like to make every PSC worker or self-employed contractor fit in a neat little box and put the onus on the engager to determine where they slot in on the compliancy scale.
After reading the discussion document, you would be forgiven for thinking that every individual case is easy to assess. The case study examples are so clear cut and unrealistic it’s almost caricature.
For as we know, the reality of whether IR35 applies or not is anything but black and white. In fact, there are so many shades of grey in between that there are almost unlimited ways to argue the situation.
This is why HMRC has struggled to enforce legislation in the past. So although its good intentions are to be supported, viewing the current landscape through an oversimplified lens and merely playing around with subjective rules is unlikely to improve effectiveness of the current legislation.
To make a real difference, HMRC needs a system that sorts the wheat from the chaff, and can identify abusers based on something other than gut feel. They should not be scared of rapid expansion in a modern method of working just because the Treasury would be better off if we were all permanent employees.
I have no doubt HMRC recognises and accepts the reality of this deeply complex issue and wants to develop solutions that work within the grey areas as well as the black and white ones. The discussion document asks for help and, as stakeholders, we must respond responsibly and impartially. It is still better for Spartacus to identify himself rather than letting the soldiers of HMRC do it.
There’s no doubt the industry faces change ahead. But rather than hiding away, now is the time to fasten your seatbelt and talk to your accountant about what changes you might need to put in place to reinforce best practice standards and compliancy.
If you haven’t already, I recommend anyone who suspects they might be affected by the changes should read HMRC’s Intermediaries Legislation (IR35): discussion document or speak to your trade body and get involved in the conversation while you still have a chance to make a difference.
At Intouch our priority over the weeks and months leading up to next April is to advise and support our clients making the correct decision on their IR35 status.
If you are concerned about the proposed IR35 reforms or your compliancy position, give our team of expert contractor accountants a call on 01202 375491 and let Intouch make this complex issue a simple one to resolve.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.