UK government says contractors should challenge IR35 status via self-assesment
- Reference: 1662117230
- News link: https://www.theregister.co.uk/2022/09/02/ir35_status_self_assessment/
- Source link:
Tax authority Her Majesty's Revenues and Customs (HMRC) was responding to a report by the Public Accounts Committee (PAC) criticizing high levels of non-compliance with the UK's off-payroll tax regime, IR35.
Difficulties meeting the IR35 rules, which apply to many IT contractors, in central government reflect poor implementation by HMRC and other government bodies, the PAC said.
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New IR35 rules were introduced for businesses in April 2022 following a year's delay caused by the COVID-19 pandemic. The rules were introduced in the public sector in 2017.
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The report also expressed concerns that it is too difficult for workers to challenge incorrect status determinations.
"The absence of a clear definition of self-employment, and limited access to relevant personal information for each contractor, can make it challenging for hiring organisations to make status determinations confidently," the report said. Contractors could challenge decisions with the hiring organisation, but they have no independent route to appeal.
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In response, HMRC said contractors who still disputed the tax determination after a direct appeal to the employer could reflect their own tax assessment in their Self-Assessment return.
"HMRC has 12 months from the date the return is received to open an enquiry, during which it may consider whether the employment status is correct," the department said.
"Where HMRC disagrees with a customer's Self-Assessment, all customers have the right to have the decision reviewed, and to appeal to an independent tribunal."
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Dave Chaplin, CEO of tax compliance firm IR35 Shield, rubbished the move.
"To suggest a worker can seek to reclaim monies from an incorrect assessment via the self-assessment tax system is misguided, because the worker cannot reclaim the bulk of the deducted monies, which is employers' [National Insurance]," he said.
"Also, to suggest the worker can appeal to a tax tribunal is absurd, because the cost of doing so will far outweigh the tax and could take up to 10 years to resolve as we have seen happen. The government's comments claiming there are 'appeal routes' is impractical nonsense and highlights the impediment to natural justice inherent in the IR35 reforms."
In February, HMRC compliance director Nicole Newbury acknowledged that businesses implementing blanket bans on contracting personal service companies (PSCs) could be found not to have complied with IR35, but [6]challenging decisions could be a lengthy process .
Chaplin was also unimpressed with HMRC's effort to iron out problems with the contractor tax system.
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 – i.e. 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 Personal Service Companies (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. Over in the US, there are two main types of contractors: those who fall under 1099 (Form 1099-Misc), and those who fall under Form W-2, with the latter being similar to IR35 in the UK. However, there are major differences. According to contractor and freelancer news site, contractor.com, the main difference is "in the UK, the contractor is financially punished if found to be a disguised employee, whereas in the USA, it's the client that is penalized.
The National Audit Office, an independent public spending watchdog, had already [7]pointed out that HMRC does not offset tax due from the employer against any tax already paid by the contractor or PSC. The effect was that individuals could be taxed twice depending on the IR35 status judgement. The PAC recommended that HMRC does not end up taxing the same income twice or unwittingly contribute to workers not paying their fair share in tax.
[8]How important are tech and other contractors to UK? PM candidate promises tax review if elected
[9]UK government having hard time complying with its own IR35 tax rules
[10]HMRC: UK techies' IR35 tax appeals could take years
[11]No help for IT contractors on IR35 tax errors
In response, HMRC said it already implemented a process to reduce the circumstances where it collects tax twice in respect of the same engagement in cases of non-compliance. "Where HMRC has sufficient information to identify them, it will notify the worker and their intermediary if they are entitled to claim a repayment of taxes overpaid in relation to the specific off-payroll working engagement."
But Chaplin said: "HMRC claims it has a process to reduce collecting tax twice but will only do so if it has sufficient information to identify the worker. In my view, this is not strong enough; there should be a statutory requirement for HMRC to locate and process the refund. If HMRC fails to do so, the 'fee-payers' bill should be reduced by a deemed amount of tax paid."
Seb Maley, CEO of IR35 insurance firm Qdos, said: "The PAC provided a damning assessment of IR35 reform, with the report calling on HMRC to make changes to these flawed rules. And while HMRC has agreed with the recommendations made, the tax office is merely promising to review and research these issues further.
"Ultimately, this response lacks a concrete promise to resolve several of the fundamental issues resulting directly from the introduction of IR35 reform – whether that's to ensure contractors have a fair shot at overturning unfair IR35 determinations or to give businesses every chance to comply with the rules.
"It's a disappointing – albeit predictable – response that we've seen far too often from the government whenever it's pressed on IR35."
The PAC reported that government departments were [12]having difficulty interpreting the tax rules . "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.
The NAO has [13]found that 2020-21 financial statements of government departments showed the Department for Work & Pensions (£87.9m), Ministry of Justice (£72.0m), Home Office (£29.5m), Department of Environment, Food & Rural Affairs (£19m), and NHS England (£4.2m) all made errors in IR35 assessments.
HMRC said it had undertaken "an extensive programme of customer education and support during the implementation of the reforms, and already provides additional support to address inherent challenges faced by customers where these are identified." ®
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[6] https://www.theregister.com/2022/02/22/lengthy_ir35_disputes/
[7] https://www.theregister.com/2022/02/11/hmrc_ir35_nao_criticism/
[8] https://www.theregister.com/2022/08/22/liz_truss_ir35/
[9] https://www.theregister.com/2022/05/26/mps_slam_ir35_government_rollout/
[10] https://www.theregister.com/2022/02/22/lengthy_ir35_disputes/
[11] https://www.theregister.com/2022/02/11/hmrc_ir35_nao_criticism/
[12] https://www.theregister.com/2022/05/26/mps_slam_ir35_government_rollout/
[13] https://www.theregister.com/2022/02/11/hmrc_ir35_nao_criticism/
[14] https://whitepapers.theregister.com/
Re: boom for offshore consultancies
Of course it helps if your wife's family owns one of those large Indian firms.
Re: boom for offshore consultancies
you don't say that some specific Indian-based firms are hugely profiteering from this scheme specifically designed to enrich their owner, do you?
The entire issue..
... has been captured by HMRC (with the core metric of maximising tax return) rather than the Government (with the ideal metric of maximising economic activity). Whenever this continued mess is challenged, MPs defer to the civil service and we get the same tired and dishonest excuses.
New MPs (and PMs!) come along promising to address these issues, but in true Yes Minister fashion rarely last more than a few weeks before they're also following HMRC's standard defences. The result is we see absolutely no new thinking around this issue, just additional layers of complexity added in a poor attempt to fix edge cases.
"high levels of non-compliance"
Hardly a surprise when HMRC cannot be arsed to explain the rules properly.
Re: "high levels of non-compliance"
I refer my honourable colleagues to an old sketch by Ronnie Barker about a simplification of the tax system...
How much did you earn last year?
How much have you got left?
Send it to us...
Has about as much thought behind it as IR35 but oddly could increase the receipts through it's simple honesty
Re: "high levels of non-compliance"
Well, everything else is going back to the '70s, why not tax as well.
How do you contest
The SA has no way to contest or reclaim Employer / Employee National Insurance Payments, Apprentice Levy and all the other Guff that Umbrella companies are bang on our "PAYE" Pay statement. No way to contest a determination even when it does not comply with GDPR or DPA.
I believe SA can only claim your tax back.
My last Inside experience was 8 months of "chuckle bro's" contract negotiation and last minute the job went Inside IR35.
So the Agency pushed it to an "umbrella company (UB)".
Both these entities are getting paid from UK Gov agency and both are using Netherlands to pay each other.
I get added to "new employee" status and UB company receives Gov kick back.
The UB pay my salary sacrifice into a US Pension fund, and it takes me 3 months to get paid and 9 months to trace and transfer my Pension.
I have now decided to only look at Outside roles.
Only winners are Agencies (Pimps), UB's and Indian (Rishi's mates) Offshore companies.
So much for UK jobs
Once again, the same stupid mistake
Quote from the PAC report: " The absence of a clear definition of self-employment "
Self employment has nothing to do with the case. A limited company contractor is an employee of the limited company of which they are the director. That is not self employment. If even the Public Accounts Committee can't get their heads round this fundamental point there's absolutely no hope at all of straightening out the mess that is IR35. The only legitimate option is to scrap it as discriminatory, unworkable and unconstitutional.
Re: Once again, the same stupid mistake
According to HMRC it is self-employment. But that's only for the purpose of destroying small business and having everyone on PAYE (except the rich, who are fine getting small salary and dividends).
Regardless, one man band limited company offering services, does not do anything different than Infosys, but when classed in scope of IR35 it de facto is forced to pay tax on revenue, which makes business impossible.
To be fair, HMRC and Treasury that came up with that should be facing criminal charges.
Re: Once again, the same stupid mistake
" According to HMRC it is self-employment. "
Indeed. They've created an anomalous and entirely unlawful (in common law terms) position where a person can be "an employee for tax purposes" but "not an employee for employment purposes". Which is why employment rights do not accrue under IR35.
If anyone had enough money this anomaly could be taken to judicial review, but it would need millions to ensure that HMRC could not simply exhaust the complainant financially (and they would assuredly try, whatever the cost).
In the meantime, HMRC have created a set of criteria for "outside IR35" that it's almost impossible to satisfy. For example, a leading subject matter expert will find it almost impossible to fulfil the substitutability requirement due to their unique expertise, but HMRC have asserted that substitutability must be an actual rather than a theoretical condition to qualify. Similarly, they have asserted that attending a client site during the client's standard hours of business (i.e. when the office is not actually locked up) can constitute "being under control".
The whole point of the vagueness and flexibility of interpretation is to disallow working outside IR35, and if that does not infringe common law freedoms I'd be very surprised. But of course government departments are allowed to break the law as they're entitled to manipulate it at will (particularly if it's regulation rather than statute).
Finally, it would be extremely informative to be told the total tax revenue accruing from IR35 versus the total cost to HMRC of implementing and pursuing it.. I suspect it would be substantially in the negative. IR35 is an outcome of politics (potentially driven by vested interests), not a common sense way to prevent fraud (as continues to be alleged).
Solutions may not be legal, but.......
....HMRC has no way of tracking cash payments........
....perhaps that is the reason for recent news that there will be NO CASH AT ALL in the much heralded "digital economy"!!
Personally, I'm looking to move to cash cards......the person who gives me the card can explain where the money went -- "I gave it to an AC!!"
Perhaps I need to become a "burner person" who wields a "burner phone"!! Other suggestions welcome!!
Link: https://www.independent.co.uk/money/digital-currency-uk-electronic-diem-facebook-cash-covid-bitcoin-china-b1834338.html
Link: https://www.theguardian.com/business/2020/feb/19/budget-2020-uk-cash-economy-close-to-collapse-campaigners-tell-chancellor
Nudge
The IR35 changes are a classic example of Nudge gone wrong.
Everything in these changes is to stop small business from operating and put everyone through umbrella companies as fake employees.
It's the easy way, let client's avoid HMRC scrutiny and most importantly removes competition for big consultancies.
If you work through an umbrella as an employee of an umbrella you can't challenge the IR35 status, because you are an employee and in that case IR35 no longer applies.
If you work through your own company, then you can't challenge your status either because the client will drop you like a hot potato and if you wanted to challenge what you have already paid through the SA, then good luck figuring out how this should work, because HMRC has not created any guidance for that and I doubt anyone would find an accountant and a solicitor willing to spend years figuring this out.
Customers....
"Where HMRC disagrees with a customer's Self-Assessment, all customers have the right to have the decision reviewed, and to appeal to an independent tribunal."
Dear HMRC. We are not customers. We are citizens, plebs, punters, mugs or even muppets, but we are not your customers. Please do not call us customers. We do not purchase anything from you. It is insulting and offensive to be called a customer of something you have no choice but to deal with.
Thank you.
A Pleb.
Re: Customers....
No hold on a minute, you may be on to something there.
If *they* consider us customers then is that not a tacit agreement that we can take our custom elsewhere?
assessments
For fear of getting them wrong and either being challenged by HMRC or Contractors it seems that most companies are taking the loophole of not working with PSCs and only engaging through umbrella as a standard policy. This means there is no assessment to challenge.
Re: assessments
When will HMRC go against the umbrella companies?
Are their contractors inside or outside IR35?
boom for offshore consultancies
The big winner from the reduction in flexible contractors from the market place in FinTech has been the larger offshore (majority Indian) consultancies. Surely that's quite a loss in tax revenues.