UK government having hard time complying with its own IR35 tax rules
- Reference: 1653553813
- News link: https://www.theregister.co.uk/2022/05/26/mps_slam_ir35_government_rollout/
- Source link:
Difficulties meeting the IR35 rules, which apply to many IT contractors, in central government reflect poor implementation by Her Majesty's Revenue & Customs (HMRC) and other government bodies, the Public Accounts Committee (PAC) said.
"Central government is spending hundreds of millions of pounds to cover tax owed for individuals wrongly assessed as self-employed. Government departments and agencies owed, or expected to owe, HMRC £263 million in 2020–21 due to incorrect administration of the rules," the report said.
What is IR35?
IR35 is a reform unveiled in 1999 by the UK tax authorities. The latest regulation change – which came into force in April 2021 – forces medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through PSCs, which are taxed at lower corporate rates.
The measures first came into effect in the UK public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
"This is not acceptable considering government departments should be in a good place to understand the rules and communicate with HMRC. However, mistakes were likely as the reforms were rushed in by HMRC and public bodies were given little time to prepare – in particular, they had only two months or less with HMRC's new guidance and tools before the new rules came into effect."
New IR35 rules were introduced for businesses in April 2022 following a year's delay caused by the COVID-19 pandemic. The rules were [1]introduced in the public sector in 2017 .
[2]HMRC: UK techies' IR35 tax appeals could take years
[3]No help for IT contractors on IR35 tax errors
[4]HMRC: Contractors, don't worry about IR35 reforms in private sector 'cos it all went so well in public sector
[5]IR35 is the biggest threat to the contractor working model, survey finds
Part of the problem complying was down to HMRC's guidance and the Check Employment Status for Tax (CEST) tool. "Some questions within CEST were difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself," [6]the PAC said .
Such difficulties do not bode well for IR35 in the wider business environment.
[7]
"Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice. The IR35 rules do not work well with the realities of contracting, both in determining workers' tax status and in resolving issues when mistakes have been made," the report said.
[8]
In February, [9]HMRC compliance director Nicole Newbury told a PAC hearing that businesses implementing blanket bans on contracting personal service companies could be found not to have complied with freelancer tax reforms, but challenging decisions could be a lengthy process.
Seb Maley, CEO of tax advisor and insurer Qdos, said the PAC's IR35 review was "damning" and highlighted many of the government's failures.
[10]
"Along with evidencing the staggering levels of non-compliance in the public sector following reform, it exposes the [11]flaws of CEST , which frankly still isn't fit for purpose despite being launched five years ago," he said.
"It also calls on the government to do more when it comes to assessing the true impact of IR35 reform on the labor market. HMRC has said the changes are generating more tax revenue, but this isn't necessarily a sign of improved compliance. In our experience, it's a direct result of genuine contractors being forced to operate on the payroll." ®
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[1] https://www.theregister.com/2017/02/27/contractors_begin_mass_exodus_ahead_of_ir35/
[2] https://www.theregister.com/2022/02/22/lengthy_ir35_disputes/
[3] https://www.theregister.com/2022/02/11/hmrc_ir35_nao_criticism/
[4] https://www.theregister.com/2022/02/09/hmrc_ir35_status_study/
[5] https://www.theregister.com/2022/01/26/ir35_is_the_biggest_threat/
[6] https://committees.parliament.uk/publications/22345/documents/165286/default/
[7] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/front&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2Yo9PwiSn3WubkIkuGvnt2wAAAEE&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[8] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/front&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44Yo9PwiSn3WubkIkuGvnt2wAAAEE&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[9] https://www.theregister.com/2022/02/22/lengthy_ir35_disputes/
[10] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/front&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44Yo9PwiSn3WubkIkuGvnt2wAAAEE&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[11] https://www.theregister.com/2022/01/13/cest_tool_popularity/
[12] https://whitepapers.theregister.com/
False information
Why do you keep posting false information?
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through PSCs, which are taxed at lower corporate rates.
There is no such thing as "taxed at lower corporate rates". The way contractors pay themselves - small salary + dividend - which they pay corporation tax on top, is now taxed on par with PAYE since 2017.
The problem is that IR35 is essentially a revenue tax and prevents you from running business since you cannot claim legitimate business costs against your tax.
While being Inside IR35 you still have to pay for your accountant, insurance, office, tools and so on, but that money comes from your deemed salary that you have to loan to your company essentially running it into debt.
This is an awful piece of legislation that makes no sense (unless you are a big consultancy - it helps with getting rid of competition).
Re: False information
If you're actually spending significant sums on equipment, there is no way you are inside IR35 and you should not be in that contract. If you're inside IR35 you don't need an accountant.
Outside IR35 I was taxed at a lower rate by being able to employ my spouse as a director (they don't have another paid job). That effectively doubles all the tax rate thresholds, and makes a big difference. I'm now forced inside IR35 and have put my rate up by 36%. Luckily this client has agreed, but the next one may not.
Its a complete farce.
These rules have never worked. HMRC is out of control and has a vendetta against small businesses. I don't know if its because it makes their life easier if you just have a few big businesses you can have cosy chats with or because they've been given advice by companies that would like small businesses out of the way.
HMRC refused to appear in front of the Commons Business Committee when they were investigating IR35 - HMRC are big on kicking the little (man || woman) but don't like answering questions regarding their own governance.
Re: Its a complete farce.
"These rules have never worked. HMRC is out of control and has a vendetta against small businesses. I don't know if its because it makes their life easier if you just have a few big businesses you can have cosy chats with or because they've been given advice by companies that would like small businesses out of the way."
This isn't a one-or-the-other situation.
"Difficulties meeting the IR35 rules [..] in central government reflect poor implementation"
Given the amount of trouble that these rules are causing at all levels, I would say that that is the wrong conclusion.
To me, that amount of difficulty clearly indicates that the rules are poorly drafted and inherently contradictory, which does not make for easy implementation.
When you've made a square peg to go into a round hole, it's easy to blame the people who can't put it in.
Fix your shit.
If you can't even figure out how to follow your own rules then you can GFY if anyone else should be expected to obey them either.
Hilarious
So these government departments have been employing contractors outside IR35 and now have to stump up PAYE+NI+NI. Not really a problem as the money goes to the government, which can hand it back as an increased budget (+ bonus for the department heads).
If the contractor is smart, they will claim back the taxes they paid. Net result is a loss for HMRC instead of what they claim is increased tax revenue from their enforcement actions.
UK Government members not following their own rules?
Surely not?!!!
Can anyone get it right?
PAC comment " tax owed for individuals wrongly assessed as self-employed "
Apparently even the Public Accounts Committee can't get it right.
Contractors working through 'personal service companies' are not self employed. They're employees of the PSC. The only difference in employment status between a PSC contractor and an IR35 contractor is which company employs them - a PSC accountable to the contractor or an unaccountable 'umbrella' company they can't choose or challenge. In the tax domain,the only difference is that almost all PSC activity frowned on by HMRC is lawful tax avoidance, whereas umbrellas have evaded tax on multiple occasions.
Until this fundamental misunderstanding is eliminated, there's not a hope in hell of any common sense emerging to correct this abusive and discriminatory taxation regime.