IR35 has repeatedly made the headlines in recent months. Could the media attention and mixed tribunal results lead to changes in this problematic piece of tax legislation?
Two high profile cases involving IR35 contractors were in the news earlier this year. A tax tribunal ruled against BBC Look North presenter, Christa Ackroyd whilst HMRC lost its case against an IT contractor who had worked on the Universal Credit programme for the DWP.
HMRC have found it difficult to enforce their view of how the IR35 ‘off-payroll working’ legislation should be applied and the government is consulting on how to increase compliance.
IR35 isn’t working
The consultation hinges on the following premiss: Current legislation is not working effectively. The cost of non-compliance in the private sector is high and growing – projected to increase from £700 million in 2017/18 to £1.2 billion in 2022/23.
The question of whether rules brought in for public sector engagers in 2017 should be adapted for private sector engagers is also key.
Avoiding employment taxes
IR35 rules were introduced in 2000. They apply in cases where someone would otherwise have been treated as an employee had they not been working through a limited company in which they had a material interest. According to HMRC, IR35 is also intended to stop individuals avoiding employment taxes by working through their own company. These rules apply to contractors, including IT consultants, management consultants, and project managers.
In April 2017, changes were introduced in the public sector which made the end user responsible for deciding whether IR35 rules apply. They were also responsible for deducting and paying any tax due. HMRC believe that these changes increased compliance in the public sector as well as raising a further £410 million in income tax and National Insurance contributions. Research by HMRC suggests public sector employers have not been unduly cautious in their approach, and have generally assessed employment status on a case-by-case basis.
IR35 in the private sector
For the moment, the changes to the rules for IR35 in the public sector do not apply to contractors in the private sector.
HMRC have stressed that the fundamental principles of the off-payroll working rules – that the employment status test determines who should be taxed as employees – are not currently open for discussion. Their focus now is on facilitating compliance in the private sector.
Making decisions on employment status can prove very difficult. HMRC estimate that two thirds of contractors working through a company are genuinely self-employed, and outside the scope of the rules. However, the rules are complex, and criteria such as mutuality of obligation, the degree of control exercised, and the right of substitution must be considered.
To discuss any matters arising from IR35 or a review of the management of your business, please speak to your usual RfM advisor. Alternatively, contact one of our offices or enquire online.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.