Employed or not: Is HMRC wrong on IR35 determination?

Employed or not: Is HMRC wrong on IR35 determination?

Since the turn of the century, the UK’s tax code has grown into one of the largest in the world.

Yet it’s not so comprehensive that it can overcome all of the issues which confront HMRC.

One notable headache has been how to deal with a rise in the number of individuals who are self-employed.

IR35; The Facts

Back in 2000, HMRC introduced off-payroll working rules known as IR35 which aimed to prevent people employed as consultants by many private and public sector organisations avoiding employment-related taxes by funnelling income through their own companies.

However, it’s fair to say that those rules haven’t been a complete success. If anything, the situation is arguably more complicated now than it was then.

For one thing, there are far more self-employed. Figures published by the Office for National Statistics in February revealed that the number of self-employed increased from 3.3 million in 2001 to 4.8 million in 2017 – making up just over 15 per cent of the entire working population.

The problem is not necessarily the number of self-employed but how they are taxed.

In April last year, the Government made changes to the rules relating off-payroll employment in the public sector. As a result, the Treasury maintains, an extra £410 million in tax has been generated without harming performance or recruitment.

It’s perhaps natural, therefore, that ministers have now turned their sights on the private sector in a parallel effort to extract more cash.

After all, Financial Secretary to the Treasury, Mel Stride, reckons that some 90 per cent of self-employed working in the private sector are paying less tax than they owe – a shortfall which he calculates could be as much as £1.2 billion a year.

A consultation is currently underway with a view to rolling out some of the changes imposed on the public sector to private businesses (learn more).

In acknowledging the economic contribution made by contractors across a wide range of industries, Mr Stride has insisted that there should be “a fair tax system that balances efficiency and simplicity for taxpayers”.

Whilst those are sentiments with which we no doubt all agree, new research suggests that the reality facing contractors is rather more complex than Mr Stride would like.

The Daily Telegraph has reported that flaws in one online tool provided by HMRC to help contractors work out whether they are caught by IR35 or not comes to the wrong conclusion “in almost half of cases”.

If this critical analysis is correct, it could mean that contractors using the Check Employment Status for Tax tool (or CEST, for short) are paying more tax than they should.

One commentator has claimed that HMRC is “failing in its duty of care” by “trying to get the most amount of tax rather than the right amount”.

The revelation will justifiably cause concern, especially as it comes with HMRC intent on extending the reach of IR35 rules and the rigour with which they’re applied.

I believe that it’s in everyone’s interest – HMRC, contractors and the organisations with which they work – to have the rules clear and the correct amount of tax paid.

Surely that means making sure that the system is robust and operates correctly before pressing ahead, something which means possibly storing up difficulties and having to unpick errors in the future.

Learn more about IR35 and personal service companies here or be sure to contact us for more information about IR35 related matters.

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