IT contractors and employment agencies are being urged to throw their weight behind a campaign that is calling on the government to “fix or ditch” its controversial IR35 tax avoidance legislation.
The campaign, overseen by contracting authority ContractorCalculator, is being launched ahead of the government’s Spring Budget on Wednesday 15 March 2023, and seeks to reverse the “damaging effect” IR35 legislation is having on UK businesses and the contractor community.
To this point, IT contractors, employment agencies and end-hirers are being encouraged to write to their MPs in the lead-up to the budget with details about how IR35 is affecting their livelihoods and businesses.
Changes to how the IR35 legislation works in the public and private sectors were introduced in April 2017 and April 2021, respectively.
The changes saw contractors lose control of determining for themselves whether the work they do and how it is performed means they should be taxed in the same way as salaried staff (inside IR35) or as off-payroll workers (outside IR35).
Instead, responsibility for determining how they should be taxed now rests with the public and private sector hiring organisations, which are expected to individually assess the employment status of every contractor they engage.
The changes were introduced as part of a disguised employment clampdown by HM Revenue & Customs (HMRC), which is of the view that the system of allowing contractors to determine their own employment status was being abused by some individuals to artificially minimise how much employment tax they paid.
However, shifting responsibility for determining how contractors should be taxed onto the organisations that engage them has not been without its difficulties, due to the increased administrative burden the changes have placed on the public and private sector organisations in-scope of the legislation.
In response, Computer Weekly has reported on numerous instances whereby public and private sector organisations have sought to side-step the changes by introducing hiring bans that prohibit the engagement of contractors or rules that all of the contractors on their books are inside IR35 by default.
Dave Chaplin, CEO and founder of ContractorCalculator, said – in addition to the above – there are a number of other “fundamental flaws” with the legislation that are having a “punitive effect” on UK businesses and the wider economy.
Chief among them is the problem of double taxation, also known as the settlement offsets issue, whereby HMRC is failing to take into account the amount of tax contractors have already paid in instances when calculating how much tax is owed by non-compliant end-hirers.
This has led to accusations that HMRC is collecting more tax than is due when penalising public and private sector organisations for IR35 compliance failures.
“Off-payroll needs to be fixed or ditched to win back the trust of the self-employed, and whilst we are unlikely to see a U-turn, some straightforward amendments to the law would go a long way to achieving that,” said Chaplin.
“The double taxation flaw is crippling. It sees contractors and firms paying taxes on the same money and firms receiving tax bills four times more than they should. Surely, this is the antithesis of conservatism?”
He added: “HMRC has known about this flaw since March 2018, but never warned ministers in its associated impact statement when the legislation was pushed through Parliament.”
Another issue with the legislation is the fact that recruitment agencies can find themselves saddled with another firm’s tax bill, despite not being part of the decision process when the contractor is hired. Also, there remains no means for contractors to appeal or challenge an employment status decision once it is made.
Crawford Temple, Professional Passport
“The most serious flaws result in double taxation, tax injustice and impede access to natural justice for taxpayers. Such effects are misaligned with conservative values and are politically toxic for the incumbent government,” said Chaplin.
“If the government wants to win back the trust of the self-employed and secure their votes in the next election, it needs to take a serious look at the legislation and fix its flaws.”
Crawford Temple, CEO of independent umbrella company compliance assessment firm Professional Passport, said he was not convinced IR35 would feature in any of the chancellor’s budget announcements, but urged the government to consider a review of how HMRC’s online Check Employment for Status Tool (CEST) works.
“I would urge [the chancellor] to take a long, hard look at HMRC’s Check Employment for Status Tool and finally recognise that it needs to be withdrawn from use. It must be the most expensive free tool on the market when you look at the eye-watering penalties government departments have faced over the last year or so because they used CEST and got the determinations wrong,” he said.
“All told, the off-payroll legislation and CEST have caused mayhem for the contracting workforce and hirers who have all been unfairly penalised as a result. HMRC needs to hold up its hands and admit that CEST is flawed, has been an abject failure, and must be ditched.”