Contractor IR35 Open Letter
We set out here a contractor IR35 open letter to Boris Johnson and Sajid Javid about impending doom if they allow the Blanket Banning of contractor using personal service companies.
They didn’t mean this to happen and so they must stop it happening if they are not cause immense damage to the UK’s major companies and the UK economy.
Questions on Contractor IR35 Open Letter
- What Major IR35 Mistake is the Conservative Government about to make?
- Who called for the Government to ‘repeal the silly IR35 tax”?
- Contractor IR35 Open Letter – why is HMRC’s IR35 test promise flawed?
- Why are companies blanket banning personal service company contractors?
- Why are companies wrongly interpreting the right of substitution to fail contractors?
- So, why will UK companies soon be working at sub-optimal levels?
- Why are contractors worried about operating inside IR35?
- Contractor IR35 Open Letter – why do Contractors Not Trust HMRC promises?
- What will contractors do if personal service companies are banned at their companies?
- What will happen at companies where contractors leave en masse?
- So, what will happen to profits at companies who blanket ban PSC contractors?
- Will Brexit get the blame for a downturn in the economy caused by IR35 changes?
What Major IR35 Mistake is the Conservative Government about to make
Dear Boris / Sajid,
Your Government is about to make a major mistake that will cause great damage to all the top UK companies and so also to the UK economy. As the mainstream media have very little inkling of what is going on here they are likely to look for other culprits to blame for any UK downturn.
And the factor that is most likely to get the blame over the next couple of years is Brexit.
As you know very well, if Brexit is a failure, you will be judged to have failed too.
And it is so unnecessary.
Neither yourself nor your Chancellor Sajid Javid are responsible for this legislation. Your predecessors Cameron, Osborne, May and Hammond are responsible for the IR35 legislation.
You just inherited this mess.
Who called for the Government to ‘repeal the silly IR35 tax”
Indeed, Sajid, in your previous guise as Managing Director of Deutsche Bank you demanded that the Government “repeal the silly IR35 tax”.
It’s become a lot sillier since you said that.
What the Government intended when they decided to implement the IR35 changes in the private sector in 2020 was that companies would decide the individual statuses of their contractors. They had to do this individually and not blanket assess their contractors.
Companies would decide which of their contractors would be inside IR35 and who would be outside.
They could use whatever method they wanted for this purpose.
Contractor IR35 Open Letter – why is HMRC’s IR35 test promise flawed
However, HMRC built an online IR35 test that they could use. It is called CEST – Check Employment Status for Tax. HMRC have guaranteed the results. If a contractor passes this test then, even if it is later shown that he or she was really inside IR35, HMRC would not pursue the company for the contractor’s back tax, interest and penalties.
There is one proviso, though. The data entered must be accurate.
HMRC have just added to the fear factor by fining the NHS £4.3m for ‘misuse of he CEST test.”
This means that companies, even if they use the CEST test, can now not be certain that they won’t be pursued for contractors’ back tax, penalties and interest.
Why are companies blanket banning personal service company contractors
So, many of them have decided to blanket ban the use of personal service company contractors completely. They are making all their contract jobs inside IR35. That’s even if the contracts and working practices for the contractors involved would put them outside IR35.
Some companies are going even further by testing all their contractors individually using HMRC’s IR35 test but telling them they will fail it before they have even sat it.
Indeed, one company are even failing all their contractors using reasons that have been rejected by UK courts and tribunals.
Why are companies wrongly interpreting the right of substitution to fail contractors
A judge at the Lime-IT Lisa Fernley case said the onus was on HMRC to prove that a contractor would not provide a substitute. Just because the contractor had not done so, so far, was not good reason to say that they would not. The burden of proof lay with HMRC. There would have had to be an occasion when the contractor should have provided a substitute and did not.
Yet one company told all their contractors that one of the three reasons for failing them was because they had never provided a substitute. This reasoning is contrary to UK case history.
So, why will UK companies soon be working at sub-optimal levels
Companies are currently working at their optimum level when it comes to the split between the permanent staff they use and the contractors they use.
Any change to this will mean that the company is no longer working to its optimum level.
You are probably hoping that contractors just accept their fate and all of them stay at their current companies and just pay more tax.
However, as we saw in the public sector in 2017 that is not going to happen.
Why are contractors worried about operating inside IR35
Many contractors are very worried that if they allow themselves to be classified now as inside IR35 contractors that would open them up to investigation for previous contracts.
Some older contractors have already decided to retire rather than suffer potential investigations and have a lot less take home income.
Other contractors have decided that the risk of investigation and potential back tax, interest and penalty losses is not worth it and are going to leave their current positions at blanket ban companies to wait for opportunities at companies who will not blanket ban PSC contractors.
Contractor IR35 Open Letter – why do Contractors Not Trust HMRC promises
Contractors know that HMRC said that they will be focused on getting future tax in rather than in pursing contractors for back tax.
However, that is not exactly a promise. There is plenty of wriggle room for them there.
Contractors also know that HMRC guaranteed that they would not pursue companies and organizations for contractors back tax, interest and penalties if the contractors sat and passed HMRC’s CEST test.
Then they fined the NHS, who tested all their contractors, £4.3m for ‘misusing’ the CEST test. And they are the sole arbiters of who is misusing the CEST test and who is not.
Indeed their test is widely mocked as not representing actual IR35 law. Indeed this test has no basis in law at all and is only HMRC’s idea of what IR35 is. As they have lost 80% of all cases that they have brought against contractors to employment tribunals it must be said that they don’t have a very good grasp of IR35 laws.
So, there is going to be massive disruption at all of the UK’s major companies just at a time when changes caused by Brexit will be added to their current burden.
What will contractors do if personal service companies are banned at their companies
We are running a poll currently (See top right of page (PC users must go to desktop mode)) which shows that 80% of contractors say that they will leave if their client company bans personal service company contractors.
Of course, some of this is what they would like to do but necessity may mean some of them don’t.
However, even if the figure is lower, we can see that there is still going to be massive disruption. There is also the morale factor. This is sure to be at rock bottom levels among contractors at those companies who blanket ban. Good luck on companies who have to get crucial systems done on time and Brexit system changes done.
What will happen at companies where contractors leave en masse
Those contractors who leave because of the new IR35 rules will take not only their skills and experience with them but their systems knowledge and business knowledge of those companies.
The Government is gambling that contractors will all stay put and just pay the extra tax.
If that gamble fails then there is going to be a huge negative disruptive effect right across the UK economy. All of the UK’s biggest companies will be hit.
What will happen to profits at companies who blanket ban PSC contractors
Profits will fall, resulting in less tax being paid. Fewer people will be employed meaning fewer people will pay tax to the Government.
Companies will have less money to invest in their businesses. People who are not hired by those companies (or are laid off) will not spend their earnings in the economy. They will also cost the Government in terms of unemployment benefit.
And this is all all for a tax that will bring in just £3bn in 4 years. That’s the equivalent of less than a tenth of a penny on income tax.
I’ll bet that across the land UK companies are calculating the one-off effect on them from the IR35 changes and the ongoing annual costs of administrating the IR35 rules.
And I’ll bet that, if all those were added together, the costs to our companies would dwarf the extra tax to be brought in by IR35.
All of our major companies will be working at less than sub-optimal level. This could potentially plunge the country into recession later this year and next year.
Will Brexit get the blame for a downturn in he economy caused by IR35 changes
And, as the mainstream media are not aware of this potentially huge IR35 problem, do you know what will get the blame for any downturn in the economy over the next few years?
Yes, that’s right.
It will be Brexit.
There is still time for the Government to announce that companies cannot blanket ban PSC contractors just as they cannot blanket assess them.
The other thing that the Government must do is to make sure that HMRC’s CEST tool is fit for purpose, i.e that it reflects UK case law in areas like substitution. It must get updated to reflect case law verdicts. They must get an independent arbiter to examine it. All we ask is that it reflects current UK case law and not HMRC’s flawed view of it.
If they don’t do these two things then the cost to the UK economy will be enormous.
So, ends our Contractor IR35 Open Letter to Boris Johnson and Sajid Javid.
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