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January 30, 2020updated 31 Jan 2020 8:34am

IR35 is Going “Catastrophically Wrong” and IT Contractors are Getting Burned

Tax changes are just seven weeks away.

By CBR Staff Writer

The words “IR35” are a powerful soporific to many – perhaps why the “absolute shit show” of a tax change taking effect in less than seven weeks has not got the high profile attention it deserves, even has the imminent impact grows starker.

This week critics told Computer Business Review that the changes were leading to delays in IT projects – one CEO told us that the new rules were going “catastrophically wrong”, while a freelancer contractor described the situation as “freaking us out” – as over 3,000 freelancers working for their company face the prospect of losing hard-won flexibility, and a hefty chunk of their take-home pay too.

What is IR35?

IR35 tests whether freelancers/contractors should be classed as employees for tax purposes.

In April 2017 HMRC changed the rules for the public sector, making the hiring organisation responsible for determining the employment status of contractors, often simply using a notoriously inconsistent and inaccurate online assessment.

On April 6, 2020, this rule will also apply to the private sector.

What’s the Problem with this, Exactly?

Many large employers, reluctant to tackle the legal or logistical nuances of assessing  on a case-by-case basis, have taken a blanket approach to contractors, ending the use of freelancers outright, making them PAYE employees with taxes deducted at source, or outsourcing contracts to agencies like Randstad who are, in turn, allegedly failing to conduct case-by-base assessments of the staff on their books.

One IT contractor who preferred to remain anonymous told Computer Business Review: “HMRC raised $40m pursuing contractors retroactively, so most people don’t want to go PAYE as HMRC thinks its then open season on them, and assumes they should have been paying more tax all along. Two years ago we were told we could go PAYE or register as a limited company and have contracts handled via Randstadt.

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“Now they’re saying they can’t deal with limited companies either. Our original contract says we can refuse a shift, under a mutuality agreement, so we cannot be under PAYE: we are not promised work and not forced to take it. And if we do [shift to PAYE], we’re going to lose something like 30-48 percent of our income.

“It’s freaking us all out as we don’t know if we want to be assessed. It’s a bullying attitude. The only recourse you have is to appeal and then even if you win that appeal you don’t get back the money you’ve lost while PAYE.”

Ed: Not this kind of blanket approach…

Blanket IR35 Approaches: “It’s All Going Catastrophically Wrong”

James Poyser CEO of inniAccounts, an online accountancy for contractors, has launched a site for contractors to anonymously name and shame their clients for blanket approaches.

Among the hundreds of names now listed are Accenture, Barclays, Deloitte, Deutsche Bank, the Department of Work and Pensions, GSK, HSBC, Vodafone and more.

He told Computer Business Review: “It’s all going catastrophically wrong.

“Large organisations have to take ‘reasonable care’ in determining the status of a consultant, but it is clear that may are simply going to ban engaging with the self-employed and only deal with people using PAYE.

Poyser added: “Lorry drivers have been caught up in this. IT contractors have been caught up in this. It cuts across really wide parts of society.

“It’s an absolute shit show.

“There’s got to be an intervention of some sort. The Treasury are doing a review, but they don’t make a jot of difference. We want it legislated that large organisations have to give a fair assessment; meanwhile we’re hearing projects are grinding to a halt.”

HMRC Has a “Bee In Its Bonnet” About IR35

Alexander Wilson, a barrister at Invicta Chambers, told us: “HMRC has a really big bee in its bonnet about IR35.

They are known to have asked clients for lists of contractors. [But] to say an IR35 assessment is easy would be wrong. There’s pages and pages of arguments and reasoning… it’s quite a judgement call to make on many levels.

He added: “I see two major problems; retrospective enquiry, and employment rights.

“While HMRC have given some assurance that an inside IR35 assessment will not in itself lead to an enquiry into the tax affairs of an individual contractor, I don’t think that promise is much of a protection. HMRC are known to conduct enquiries based on a risk-assessment approach, so that if sufficient red lights appear on an individual’s dashboard, they may be selected for investigation.

“It seems to me (and I am not alone in this) that any change from IR35 not applying to it applying going forward, will be a red light as far as HMRC are concerned.”There is nothing to prevent an investigation and every reason to think that an enquiry could happen. The greatest risk of all is if a single engagement being carried on (i.e. an ongoing contract with the same client) changes from IR35 not applying to it then applying. If the contractor continues to do the same type of work, old contracts are also at high risk of an enquiry into IR35 status.

He added: “If I were a contractor previously operating outside of IR35, I would be very cautious indeed of accepting any engagement for which the engaging client intends to determine that the legislation applies.

Pitfalls for Employers too… 

The tax specialist emphasised that while HMRC maintains that IR35 assessment is independent of employment status, there are pitfalls here for employers.

“IR35 status is based on the same test as is used for employment law.

“The legislation says that if you would be regarded for income tax purposes as an employee, then the legislation will apply. Section 4 of the Income Tax (Earnings and Pensions) Act 2003 says that this essentially means ‘employment under a contract of service’. That is legislative shorthand telling us that the draftsman intended that the common law test for employment should be used.

Wilson added: “So, while employment status does not follow IR35 status (e.g. just because you are treated as an employee for tax purposes, doesn’t automatically mean that you are an employee), it is my opinion that if IR35 status and employment status are both correctly assessed, then they can’t be different.

“As a consequence, if I were a contractor and told that IR35 would apply to the engagement, I would press very hard for employment rights (paid holiday, pension etc.) The employment tribunal would not be bound at all by the decision of the client but it is difficult to see how a client could argue against the employment test having been met if the IR35 test has been met (unless they made a bad blanket decision on that – in which case, back-peddling should ensue).”

Have you been affected by IR35 shenanigans as a contractor/is it forcing unwanted changes to your business? Computer Business Review is keen to hear from you

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