IR35 has been part of the tax landscape for contractors for two decades. It was introduced to tackle the perceived problem of so-called 'disguised employment', where workers who hold themselves out to be contractors (usually operating under their own company), really ought to be treated as employees (and taxed accordingly).
It’s fair to say that this complex and often bewildering set of rules has attracted more than its fair share of controversy. Not least, it has meant that genuine contractors are routinely being faced with the hassle and cost of responding to HMRC employment status investigations.
All too often, the end result of such an investigation is that contractors are hit with a double whammy: they are treated as employees for tax purposes and find themselves faced with demands for back tax and NI contributions - but back on the ground, they get none of the standard benefits that come with actual employment such as paid leave, accrued rights and long-term security.
So what does this set of rules mean for contractors on the ground? With the help of some key facts and figures, we take a closer look…
April 2019 employment figures show that the self-employed sector has grown by 76,000 in the last year
From HMRC’s attitude and pronouncements regarding contract working, one would be forgiven for thinking that the move towards contracts for service was one huge tax scam.
The reality, of course, looks very different. From specialist project management through to aiding with particular aspects of IT transformation, organisations will always have a need to draft in additional help. It makes sense for them to engage contractors to fill these needs. Likewise, it makes sense for those contractors to operate under an intermediary (i.e. their own company). Quite apart from any tax considerations, this type of set-up enables you to draw a clear line between you and the services you provide. You are a business - and ought to be treated as such.
There are sound business reasons for both parties to set up a working arrangement in this way. As IPSE stated when these figures were introduced, it should be the mission of government to give this sector the support that it needs: “Above all, it should not add more confusion to it with the hugely damaging proposed changes to IR35 next April”. Which brings us onto this…
HMRC estimates that non-compliance with IR35 will cost the economy £1.3 bn by 2023/24
At the present time, IR35 only applies to public sector contracts. But in last year’s autumn statement, the UK government announced that it would be rolling out the rules to cover the private sector too.
Following the autumn statement, the government launched a consultation process to gauge reactions and it's fair to say that those reactions were less than positive. This concluded at the end of May. Business leaders are saying that the April 2020 rollout date gives far too little time for firms to prepare for the changes and revise their contract procedures. However, as to whether the government heeds these warnings is a case of ‘watch this space’.
Ultimately though, it seems that the changes will be coming to the private sector - even if it is a little later than next April. The end result: all contractors need to be aware of the consequences of IR35, whichever sector they are active in.
£24,981: the level of additional tax & NI liability a £500/per-day contractor could be faced with under a contract that is in place for a single year
Your liability could be greater than you think. For a broad overview of the level of repayment you could be faced with if your contract for service arrangement is deemed to be a sham, explore the calculator for yourself.
250: The Number of IR35 enquiries HMRC is committed to tackling at once
Do not underestimate HMRC’s commitment in this area - and it’s best not to assume that an IR35 investigation is 'something that happens to other people'! HMRC’s specialist teams are situated throughout the country. These are the people who investigate claims. They are primed, well-resourced and will almost certainly be stepping up their activities once the private sector roll-out comes.
79: The number of contracts out of 94 that HMRC was unable to give an opinion on
This was in 2013. Fast forward to the present and it seems that HMRC's IR35 status determination tool CEST STILL isn’t fit for purpose. HMRC’s Check for Employment Status for Tax service is designed to deliver clarity on whether or not you are IR35 compliant. Quite simply, it cannot be relied upon for a useful assessment.
For a much more reliable picture, be sure to check out our contract review service.
Additional IR35 advice
For lots of helpful hints & tips on maximising the chances of proving that your contract lies outside of the scope of IR35, explore our Knowledge Hub.
If you’re concerned about IR35, we offer a range of contract reviews with comprehensive advice on how to stay outside the legislation. We also offer IR35 Tax Investigation & Liabilities insurance (TILI), which includes tribunal defence from our resident tax and IR35 expert Andy Vessey ATT as part of the policy. Andy is also available for IR35 training, conferences and specialist commentary on the off-payroll rules. Please get in touch.