Contractors Inside IR35
The percentage of contractors inside IR35 is 31%.
The percentage of contractors outside IR35 is 54%.
This is according to a Freedom of Information request from ContractorCalculator.
This information comes from over half a million people using the Check Employment Status for Tax tool (CEST).
The test couldn’t determine the status of the other 15%.
New Government IR35 Rules for Public Sector Bodies
The background to this is in the Government’s new IR35 rules in the public sector.
They implemented this in all of their departments in April 2017.
Previously, all contractors and freelancers decided heir own IR35 status.
If they got it wrong, HMRC could potentially chase them for back tax, penalties and interest.
However, there was safety in numbers.
There was more chance of lightning striking a contractor than being the object of an investigation for IR35.
Contractors inside IR35 were able to get away with it more easily.
They could always take out IR35 Insurance.
Are Most Freelancers Tax Avoiders?
The Government believe that most freelancers are tax avoiders.
This is shown by both Prime Minister Theresa May and the Chancellor saying that it was an unfair anomaly that a self employed person earning £100,000 a year pays less tax and national insurance contributions than an employee earning £100,000 a year.
They aim to fix this ‘unfair anomaly’.
Freelancers Have More Expenses and Less Benefits Than Permanent Employees
Of course, everyone who freelances knows that it is not comparing like with like.
Permanent Employees get a lot more benefits than contractors.
They are also in safer positions than contractors.
So, there should be a risk premium in being a contractor.
There are also expenses that freelancers have that permanent employees don’t have.
However, the Government decided that they would change the IR35 rules in their own departments.
Contractors No Longer Decide Their own IR35 Status
They would change who decided a contractor’s IR35 status in the public sector.
The contractor would no longer decided his or her own IR35 status.
The Government department hiring them would decide this – the Public Sector Body or PSB as they refer to it.
The Government’s idea is tat it would catch contractors inside IR35.
Check Employment Status for Tax Tool
They would use HMRC’s Check Employment Status for Tax tool (CEST) to determine a freelancer’s true IR35 status.
If the freelancer passed the test then HMRC said they would accept this result.
The freelancer could continue to use a Personal Service Company (PSC) as he or she did previously.
However, if they failed the test, the fee-payer, in most cases their agency, would have to deduct tax and National Insurance before paying the contractor.
However, many smaller agencies are not set up to deal with this.
Contractors Joining Umbrella Companies
So, in practice, most contractors inside IR35, who failed the CEST test, joined umbrella companies.
Previously, more than 90% of contractors operated through personal service companies with most of the rest using umbrella companies.
Now, as we see, only 54% of contractors get a clean bill of health for IR35.
One would assume that in the case of the 15% where there is no clear verdict of whether a contractor is inside IR35 or outside, according to the test, most employers would not take a chance.
So, one would expect that 54% of contractors could still operate via Personal Service Companies whereas 46% could not.
That’s pretty close to a toss-up.
One would expect that the vast majority of those who took the test are those who work for Public Sector Bodies.
Contractors Working in the Private Sector
However, there’s no reason to believe that the numbers would be different for freelancers working in the private sector.
Although this has been implemented only by Public Sector Bodies so far, it is predicted that it will be implemented in the private sector too.
They could announce it in November’s budget and implement it in April 2019.
After all, if Theresa May thinks it is unfair that self employed people who earn £100,000 a year pay less tax than permanent employees earning £100,000 a year, she is hardly likely to believe that this is only unfair in the public sector and not the private sector.
Public Sector Bodies Falsely Implementing IR35 Changes
The problem has been made worse by some Public Sector Bodies falsely implementing these IR35 rule changes.
Every contractor is supposed to be tested separately.
However, one public sector contractor in the NHS told us that he and two colleagues were tested at the same time.
The project manager input the details.
However, he kept being interrupted by the woman from HR who reversed his verdict on some of the questions.
As you can imagine, none of these changes favoured the contractor.
Blanket Ban on Contractors Using Personal Service Companies
Also, some like the MoD and NHS had a blanket ban on using contractors who operated through personal service companies.
Contractors that they currently use had to change their way of operating.
That was even though many of them were actually outside IR35 and could pass the CEST test.
The major consultancies, who would benefit from the demise of the contracting profession, were advising them to do this.
Contractors Inside IR35 in the Future
They said it was too risky as contractors who passed the test now might be found to be caught by IR35 in the future if the rules changed.
This is ridiculous – but risk averse Government department managers decided to take this advice.
Unless IPSE’s and others lobbying efforts work then the Government is likely to implement this in the private sector too. This is likely to be in April 2019 or the following year.
Many contractors who currently use Personal Service Companies will no longer be able to use them.
This will lead to a significant drop in their income.
Will one of these contractors be you?
Take the test here – IR35 Status Test for Contractors
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