Government Scamming Contractors Over IR35
The Government and HMRC are combining in scamming Contractors over IR35. Most of the UK’s companies are being cajoled into putting blanket bans on contractors who operate via personal services companies.
This goes against the spirit of their own IR35 rules.
It also goes against the promise Philip Hammond made to contractors when he said that genuine contractors have nothing to fear. Those contractors are still outside IR35 in their contracts and working practices but are now being taxed as if they were inside IR35.
Questions on Scamming Contractors Over IR35
- What should have happened with the IR35 changes?
- Are blanket assessments effectively being used on contractors over IR35?
- What reason are the Government giving for companies dumping all their contractors?
- Is the Government reason for companies dumping contractors over IR35 correct?
- Why did big companies not use this great new business model before?
- Why are companies really changing their business model?
- How big a financial risk is it to companies to use PSC contractors over IR35?
- Is it fear of penalties that is causing companies to change their business models?
- Why is it laughable to believe UK companies suddenly found a great new business model?
- Will there be any change in demand for contractors?
- Will there still be plenty of work for contractors who want to operate via a PSC?
- Will there be any effect on contractor market flexibility?
- Have the IR35 changes implemented in 2000 been effective?
- Have the Government got it right over the IR35 changes?
What should have happened with the IR35 changes
What was supposed to happen was that companies would assess their contractors. Those that they assessed as outside IR35 would continue to use their personal services companies. Those they assessed as being inside IR35 would have to pay PAYE and National Insurance.
Their client company would be responsible for the contractors’ status determinations. Whoever paid the contractor would be responsible for taking the PAYE tax and NI out before paying the contractors.
According to HMRC’s rules, the hiring companies would have to take ‘reasonable care’ to make sure that their assessments are correct.
Are blanket assessments effectively being used on contractors over IR35
For instance, blanket assessment of contractors would not be allowed unless they had the exact same contracts and the exact same working practices.
If companies blanket assessed contractors with even slight variations then they were not taking ‘reasonable care’. The hiring company would then be responsible for their contractors tax – even if some other party had already paid it.
However, the Government are allowing a get-out which is completely against the spirit if the IR35 rules. They are allowing companies to get round this by sending all their current contractors to umbrella companies or putting them on their agencies’ books.
What reason are the Government giving for companies dumping all their contractors
The Government and HMRC are saying that this is just due to reviews of their business models that almost all of our big companies decided to have at the same time.
Here’s what the Government are saying:-
“The Government is aware that some organisations are considering whether PSCs are the best way to engage contractors who are working like employees.
“Businesses reported that where individuals had been moved onto payroll, this was a result of a review of the structure of their workforce”.
Is the Government reason for companies dumping contractors over IR35 correct
Doesn’t that make you want to scream out? How come so many of our top companies, including all our top banks, suddenly decided that the business models they have been using for years were suddenly not the best business models for them.
Businesses are moving from what they see as their optimal model of using a flexible workforce in conjunction with permanent employees to a model that is sub-optimal.
Why did big companies not use this great new business model before
How come our big companies did not use this new model before of dumping all their contractors on their agencies and umbrella companies?
Do you know why they did not use this model before? It was because it was not as effective as their current model which they will now have to change to a model they consider less effective.
Why write such rubbish when everyone knows why they are changing their model? Surely even the Government and HMRC do not believe this.
One hopes that Treasury Ministers don’t intend to mislead Parliament with some of this stuff.
Why are companies really changing their business model
Companies are changing their business model because of change of circumstance. It is a forced change of business model.
It has been forced on them by the Government and HMRC because of threats to fine them. They don’t want to be responsible for either making contractors’ status determinations and they don’t want to risk fines if they get it wrong.
How big a financial risk is it to companies to use PSC contractors over IR35
Let’s say a company has 1,000 contractors using personal services companies as the client company has assessed them as being outside IR35. Let’s say that each contractor’s tax is £25,000 more than it was before. Let’s say that it is after three years that HMRC have triggered an investigation of the client company.
That means hat the company would have to pay HMRC 1,000 times 3 times £25,000. That would mean the company would have to pay £75 million. That would taking a huge hit on any company’s profits.
And that would not be taking into account any interest or penalties. Remember that some of he big banks have over 5,000 contractors so you could multiply that £75m by five.
No wonder all the banks are no longer taking contractors.
Is it fear of penalties that is causing companies to change their business models
This is why companies are changing their businesses model. It is fear of the IR35 changes and potential massive penalties.
It is nothing to do with suddenly finding a new super-duper business model.
They know that IR35 is complex and surefire correct assessments are almost impossible to make. After all, HMRC are supposed to know more than anyone about IR35 yet they lose 80% of the cases against contractors they bring to the lower Employment Tribunals.
Why is it laughable to believe UK companies suddenly found a great new business model
It’s laughable to believe that, all at the same time, British business has found a great new business model which will give them an advantage against competitors outside the UK.
This new business model is forced on hem and is a sub-optimal way fo working for them. They would much prefer their current business model.
This new one forced on them by the Government will make them less competitive than their foreign rivals. This will result in lower market share and lower profits. They will hire fewer contractors due to those who will then pay less tax between them.
Will there be any change in demand for contractors
The next part of the new Government statement says:-
“However, the Government have not seen any evidence that this indicates an overall change in demand for the services and skills that contractors offer, but will continue to monitor impacts on the labour market. “
You cannot be serious!
Will there still be plenty of work for contractors who want to operate via a PSC
The Government then go on to say:-
“For contractors who would prefer to continue to use a PSC, many organisations will still choose to engage contractors in this way, where this suits their business model”.
You cannot be serious here. All of our top banks and most of our top companies have now changed to this new inefficient business model forced on them by the Government.
There are now far fewer PSC contracts available than there are contractors who ” would prefer to continue to use a PSC”.
Virtually all contractors would prefer to use apersonal services company.
How can anyone write, or believe such nonsense?
Will there be any effect on contractor market flexibility
The new Government document continues:-
“Independent research on the impacts of the reform in the public sector showed that it did not reduce market flexibility or impact use of contingent labour.”
But very few public sector organizations issued blanket bans on contractors by dumping them into their agencies.
Off the top of my head, only HMRC, the MoD and the NHS did originally -but now all of those are using PSC contractors. Indeed HMRC recently fined the NHS £4.3m for misuse of the CEST tool.
However, it is very different in the private sector where almost all our top companies are dumping all their contractors into other supplier companies.
This is new. Studying the public sector won’t give you answers as the outcomes are going to be very different.
Have the IR35 changes implemented in 2000 been effective
Oh, and here’s another crazy statement from the Government document:-
“It is widely accepted that the rules introduced in 2000 have not been fully effective.”
It is not widely accepted at all. Those rules were brought in to stop people leaving a company on a Friday and starting as a contractor on the Monday doing exactly the same. This had tax advantages to both parties.
The Government called them ‘disguised employees’.
This practice has now been completely eradicated. So, from that point of view it has been a complete success.
However, even Government Minister, Dawn Primarolo, admitted to the Professional Contractors Group that the legislation had caught more people in its net than had been intended.
Have the Government got it right over the IR35 changes
So, what do our readers think? Have the Government got the statements in this new IR35 document right? Is their perception of why businesses are changing their business models correct?
Is it correct that “For contractors who would prefer to continue to use a PSC, many organisations will still choose to engage contractors in this way”?
Are you being replaced by an offshore worker because of the IR35 changes? Do you know anyone else who is? Send me a message in confidence at [email protected]
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