Clients Decide IR35 Status Now – Contractors Lose Out

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Clients Decide IR35 Status
Clients Decide IR35 Status

Clients Decide IR35 Status

The main change for contractors in the Autumn statement is that HMRC will inisit that clients decide IR35 status now of contractors.

That’s just in the public sector for now. However, it reamins a threat that the Government will see this as a pilot project for all contractors. Those in the private sector may be next.

It was always contractors that decided that themselves. If they got it wrong then they faced an IR35 investigation. That could lead to tens of thousands of back tax, national insurance and penalties to pay.

This will take effect from April 2017.

Public Sector Contractors

Now, in the public sector, clients decide IR35 status of the contractors.

If the client decides that the contractors is outside IR35 then things just continue as normal.

If the contractor comes through an agency, or other 3rd party, the client will still decide the contractors IR35 status. The client will tell the agency what that status is.

Whoever pays the contractor’s limited company will have to deduct tax and national insurance from he contractor before paying him or her.

They would be considered to be an employee of the company for tax purposes but accrue no other benefits that a permanent employee would get.

They will have, effectively, this employed status even though they are still operating through their personal service companies.

No Change of IR35 Laws

So, is the IR35 law changing? Will it catch more contractors in its trap?

Not at all!

The IR35 laws will stay exactly the same.

The Government is trying to scare contractors who are legally outside IR35 into paying the tax.

Or rathe,r they are trying to scare the clients of those contractors into declaring them inside IR35 when they are legally outside of it.

Of course, contractors can fight this through the courts, at great expense to themselves, but they can’t claim against HMRC and the client for a mis-declaration of their IR35 status.

HMRC have fought many case aganst contractors in the past and have lost the vast bulk of them.

Government Sidestepping the Courts

Now, they, and the Government, are trying to achieve this be sidestepping the courts and intimidating clients into wrongfully declaring contractors inside IR35 so they don’t put themselves in danger.

Clients are sure to err on the safety side when making their declarations.

So, how are clients going to be able to decide contractors IR35 status?

Who in their organisation is going to do this?

How many clients are well up to date with all the nuances of IR35 legislation?

Government and HMRC

Step forward those independent arbiteurs the Government and HMRC.

They are currently developing an online test that will show if contractors are inside IR35 or outside it.

Clients in the public sector will use this to decide the status of each contractor.

So will this be a fair tool for deciding a contractor’s IR35 status?

Well, currently, more than 90% of contractor operate outside of IR35 status mostly using a personal service company.

So, why are HMRC saying that the new test will show that 90% of contractors to be inside it?

They haven’t even completed the test’s build yet.

Fixing the IR35 Test

Surely they  are not going to fix it in heir own favour again like they did the last one they built one in conjunction with contractors group IPSE.

That one showed virtually all contractors inside IR35. However, that test had no legal basis. They eventually scrapped it.

Now, it looks as if it is going to be Dodgy IR35 Test Mark 2.

Wrong IR35 Status

So, here’s one for you. If 90% of contractors were outside IR35 before and 90% of contractors will be outside it in future, how many contractors will be paying IR35 now tha they legally shouldn’t have to.

This would suggest that:-

10% of contractors will still be outside IR35 and won’t pay that tax.

10% of contractors were always inside IR35 and will continue to pay that tax or operate through umbrella companies.

80% of contractors will be outside IR35 but will be declared inside by their clients and have t pay the IR35 tax.

You could say that maybe not all of those 80% are really outside IR35 eve though they declared themeslves outside of it.

That’s not borne out by the facts. IR35 investigations have led to an extrenmely low won rate for HMRC. And that’s even when they cherry pick he most likely candidates.

This is blatantly wrong.

Don’t Legally Owe the Government Money

The Government and HMRC should follow the laws of the land and not use subterfuge to get those who don’t legally owe them money to hand over money to them.

If a private company obtained money this way, i.e. by deception, from its suppliers, it would be hauled before the courts.

So, where are contractors group IPSE in all of this?

Why do the Government alwasy feel that they can hit contractors with impunity?

Why are IPSE not more effective in preventing all these attacks on contractors income?

They should be fighting harder.

Private Sector IR35 Tests Next

If the Government gets away with this in he public sector, it is pretty much a sure thing that they will be eyeing the private sector too.

it may not be too long before they will insist that clients in the private sector get to decide a contractor’s IR35 status too.

That really would be a major blow if clients decide IR35 status in the private sector too in future.

 

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