In an eagerly awaited IR35 review published today, the government has dashed hopes among IT contractors and other freelancers that it will delay or significantly adjust hugely controversial tax changes effective in six weeks.
The review of changes to the off-payroll working rules was initiated in January 2020. The reforms will “go ahead on April 6 2020” as planned, HMRC confirmed today, reiterating that “non-compliance is widespread” and set to cost the government £1.3 billion in lost tax income annually by 2023.
It promised a “light touch approach to penalties” in the first year and has promised contractors a new “flowchart” to help them prepare.
In one major change, the government said it will “amend the legislation to exclude wholly overseas organisations with no UK presence from having to consider the off-payroll working rules… this means the individual’s limited company will continue to determine the status of the individual”.
(It was not immediately clear without seeing the precisely amended legislation how this fits in to so-called permanent establishment tax rules).
IR35 Review: What’s Happening, Exactly?
The change makes employers rather than employees responsible for determining the tax status of contractors. Many large businesses are banning the use of contractors and “personal services companies (PSCs)” outright.
With large numbers of contractors reluctant to give up working flexibility, a growing number are simply walking away from major IT projects. (Research today suggested that in anticipation of ineffective reviews of their tax status by their employer, 29 percent of contactors have begun an “unofficial strike”).
HMRC disputes the likelihood of negative impact on projects or the broader economy caused by contractor shortages. In the IR35 review today it said: “For contractors who would prefer to continue to use a PSC, many organisations will still choose to engage contractors in this way.”
It added: “Independent research on the impacts of the reform in the public sector showed that it did not reduce market flexibility.”
One IT contractor, Ashley Narayana earlier told Computer Business Review: “We are happy to pay our taxes – we’re very careful to do so in fact.
“What we resent is that those using PSCs are being forced into umbrella/IR35/perm when it’s absolutely not necessary.
“I was working in the public sector as a contractor when the changes hit. [Ed: They have been effective for the public sector since 2017] The laziness around preparing and mitigating the changes was tragically evident. Instantly, we were all declared inside as nobody could be bothered to update frameworks.
He added: “As a result, a £20 million project tanked and all the contractors did indeed leave for private sector contracts.
“That project was funded by taxpayers.”
HMRC said that customers will “not have to pay penalties for errors relating to off-payroll in the first year, except in cases of deliberate non-compliance.”
In a statement unlikely to reassure contractors concerned about retroactive tax investigations for those choosing to go PAYE, the department confirmed “information resulting from changes to the rules will not be used to open new investigations into Personal Service Companies for tax years prior to 6
April 2020, unless there is reason to suspect fraud or criminal behaviour.”
It has also moved to update the legislation to address concerns raised over the rules as they apply to off-shore companies.
Government IR35 Review: Plucking the Goose to Death?
Commenting, Dave Chaplin, CEO of ContractorCalculator and Director of the Stop The Off-Payroll Tax campaign said: “The art of taxation is supposed to be about plucking the goose with the minimum amount of squawking.
“You’re not supposed to kill the goose. Businesses that want to invest in the UK want to do so with tax certainty. We’re already seeing work being moved offshore making the UK an unattractive place to do business.”
New research published today by offpayroll.org.uk meanwhile suggested that 85 percent of contractors would consider joining a class action for employment rights as companies force them to take PAYE and umbrella options or walk awayy (one in three have chosen the latter option, it suggests).
The research, conducted with over 2,800 contractors, also found that 37 of contractors are still being assessed despite being six weeks away from go live. It highlights the extent of widespread PSC/contractor bans, major flaws in the way companies are carrying out IR35 assessments, and lack of preparedness.
Some 86 percent of those that are now inside IR35, using an umbrella or PAYE did not get a rate uplift to cover the employer’s taxes, it shows.
James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, says “The review will do absolutely nothing to turn the tide of actions being taken by contractors. The review plays down flight risk. It’s nonsense, we are very clearly seeing it happen. It seems, businesses see inside IR35 or umbrella / PAYE as the lowest-risk option, but this is far from the case, as class action starts to bubble up. What’s more many contractors would rather leave than accept these terms, presenting a risk to client projects.”
How are the changes affecting you, either as an IT contractor, or as a business working on a project? Computer Business Review is keen to hear from those affected, either on the record, or on background guidance.
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