Contractors IR35 HMRC Worst Nightmare
It looks like Contractors IR35 HMRC Worst Nightmare is about to become reality.
There’s not much that could be worse in tax and IR35 terms.
The Government made changes to how IR35 was implemented in the public sector in April 2017.
The crux was that contractors and freelancers would no longer determine their own IR35 status.
That would be determined for them by the Government department who takes them on.
And there are penalties for Government departments who get it wrong.
Reclassified All Contractors as Employees
So, many Government departments have erred on the cautious side – and reclassified all their contractors as employees.
This is for tax purposes only. There will be no benefits like paid holidays for the contractors.
This is what the BBC did.
They reclassified all their BBC presenters who had previously been operating as freelancers, as employees.
Many had been operating for years as freelancers using limited companies.
However, Lorraine Kelly recently had the IR35 verdict against her overturned at the Commissioners.
New HMRC Employment Status Test
HMRC implemented a new online Employment Status Test to help Government departments assess if contractors are really contractors – or are really employees.
They said that they expected that 90% of contractor would fail the test.
One agency operating in the public sector said that 40% of their contractors who were using limited companies failed the test and had to shut down their limited companies.
Contractors IR35 HMRC Worst Nightmare Looming
This is bad enough but contractors IR35 HMRC worst nightmare is about to become true.
With the BBC reclassifying their freelancers as employees, HMRC have now stuck the boot in.
They are saying that if the contractors have been reclassified as employees, that means that they were always really employees.
They say this means that they were never really freelancers.
So, they should never have operated through limited companies according to HMRC.
Yes, I think you can guess what is coming next.
HMRC Hunting Down False Contractors
HMRC are now hunting them down and demanding that they stump up all the back tax that they owe them for falsely claiming they were freelancers over the years.
In a separate case, Look North presenter, Christa Ackroyd, has already had to pay them the difference between the tax she had already paid and the £400,000 that HMRC claimed she owed them.
She took it to a tax tribunal and lost.
According to the tribunal she falsely claimed she was self employed when she was actually an employee.
HMRC are now looking for back tax from all of those presenters who are now classified as employees.
One of them, the Reverend Richard Coles even has several clients – and the BBC have still classified him as an employee now.
This will have to change as Lorraine Kelly has successfully appealed the HMRC claim against her. The Commissioner said that t wasn’t even close.
However, we can detect the intentions of HMRC.
They intend to pursue the back tax, interest and penalties for previous contracts of contractors who have failed their CEST IR35 test.
Public Sector Contractors
So, all those freelancer who are working for the public sector, and who have had to close down their limited companies after failing the online test, are now facing their worst nightmare.
It is the HMRC logic that if they are now classified as employees, they must always have been employees.
So, they were claiming false self-employment for all those years.
So, they owe HMRC the back tax for all the years that they claimed to be freelance and operated through limited companies.
Private Sector Contractors
Those of you who operate in the private sector should not just be looking on sympathetically.
Because the Government are planning to change the IR35 rules in the private sector too – in April 2020.
So, around 90% of all contractors, according to HMRC, will now be inside IR35 and classified as employees.
According to the agency, around 40% of those now using limited companies will have to shut them down and pay the tax as employees.
Most of the freelancers in the public sector used umbrella companies rather than pay the IR35 tax.
And not only that.
Huge Back Tax Bills
If the BBC is anything to go by, HMRC will now demand that they pay them tens of thousands, or even hundreds of thousands of pounds in back tax, penalties and interest for all the years that they operated as freelancers using limited companies.
This could bankrupt the freelancing industry.
What Happened in Public Sector
When the IR35 changes were implemented in the public sector, some departments decided that they would no longer take limited company contractors.
Those contracting through limited companies had to close them down.
Rather than pay the IR35 tax, though, there was a mad scramble for umbrella companies by contractors.
Other departments made contractors sit the new HMRC Employment Status Test. If they passed they could continue using limited companies.
If they failed they had to get themselves an umbrella company.
From what we hear about half of contractors have failed the test or have indeterminable results.
HMRC Want Employment Status Test Results
One thing about the test is that HMRC have to be sent the results for future reference.
The big fear of contractors at Government departments was that HMRC would say “If you failed the test that means that you were never really self employed. So, you owe us a whole load of back tax going back years”.
It now looks as if this is going to be the case.
And private sector workers, this is coming your way in April 2020.
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