IR35 Disaster for Companies and Contractors Alike Will Hit UK Industry

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IR35 Disaster for Companies and Contractors
IR35 Disaster for Companies and Contractors

IR35 Disaster for Companies

It is becoming more and more clear that a major IR35 disaster for companies is coming closer. It looks as if contractors are not just going to meekly accept having to drop their personal services companies.

Perhaps the Government, HMRC and companies issuing blanket bans on the use of contractors using personal services companies thought contractors would meekly accept their fate. That way business could go on as normal except that contractors would lose a major part of their income.

Contractors Questions on IR35 Disaster for Companies

  1. Why Contractors are not accepting IR35 changes
  2. What effect are blanket bans on contractors having at companies?
  3. So, what promises are HMRC making to contractors on IR35 changes?
  4. What Promises are HMRC making to Companies?
  5. Did HMRC Keep those promises in the public sector?
  6. What promises did Chancellor Philip Hammond make to contractors?
  7. What promises did Sajid Javid make on IR35 at the Election
  8. Do contractors trust the promises they are getting from HMRC and the Government?
  9. Is the degree of IR35 Disaster for Companies becoming clearer?

Why Contractors are not accepting IR35 changes

It now looks like many contractors are not going to accept this. Indeed at one company 40% of contractors have told them that they are not going to sit HMRC’s IR35 test.

There are three main reasons for this:-

  1. The Check Employment Status for Tax (CEST) test is widely believed to be inaccurate. For instance it has not been updated to include losses to contractors at employment tribunals. It is only what HMRC believe IR35 to be – and they have lost 80% of their cases taken out against contractors at employment tribunals.
  2. You appear to be able to get any result you want from the CEST test. Companies are making contractors take the test and telling them beforehand that they will fail. And that IS the result they are getting for all their contractors. However, many of those contractors have previously sat the test and passed it.
  3. Companies have to pass the results of their tests on contractors to HMRC ‘for future reference’. Contractors fear that HMRC will then chase them for back tax, interest and penalties both at that company where they are now deemed to be inside IR35 while still doing the same work and at previous companies.

What effect are blanket bans on contractors having at companies

One company was having emergency meetings after 40% of their contractors said that they would not sit the test. This would severely affect the delivery of the computer systems being built by those contractors. This scenario is likely to be replicated across the UK.

It is only now that companies are seeing the major effect that blanket banning PSC contractors will now have on their companies. This IR35 disaster for companies will feed back into company profits and the UK economy.

What promises are HMRC making to contractors on IR35 changes

HMRC have promised not to chase contractors for back tax if they are now found inside IR35.

To quote the most recent HMRC IR35 update “HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour”.

They say that they want to focus on getting future tax from contractors rather than previous tax.

That seems to cover it – unless of course, they reckon that declaring as inside IR35 when you are really outside is fraudulent.

And that is the problem. Contractors don’t have any great confidence in any HMRC promises – especially when they have a get-out clause attached.

What Promises are HMRC making to Companies

When the Government rolled the IR35 changes out across the public sector in 2017 HMRC made a promise. They said that if a contractor sat and passed their CEST test they would not chase the organization for the contractors tax. That’s even if the contractor was later found to be inside IR35.

There was one proviso. The correct data must be put in.

The NHS followed that advice and made all their contractors sit the test. Those that passed the test could continue to use their personal services. Those that failed he test had to go PAYE.

Did HMRC Keep those promises in the public sector

However, despite this, HMRC have now fined the NHS £4.3m for ‘misuse of the CEST tool’. As we have seen, it appears that you can get any result you want from this tool.

This fine on the NHS may be the trigger that caused most of the UK’s top companies to blanket ban contractors using PSCs. The companies didn’t want to take the risk of having to pay the back tax of hundreds of contractors.

As HMRC are the accusers, the police, the judge and the jury on IR35 cases, plus the Appeals Judge as well, many companies decided that continuing to use PSC contractors was too big a risk. They saw what happened to the NHS even after using the HMRC tool.

What promises did Chancellor Philip Hammond make to contractors

While this is going to put a lot more money into the Government’s coffers, it is highly unfair.

Philip Hammond said that genuine contractors have nothing to fear from the IR35 regulations they are implementing. However, if contractors are genuinely outside IR35 but are hit by a blanket ban on PSC contractors then they do have much to fear.

What promises did Sajid Javid make on IR35 at the Election

After the Lib Dems, Labour and the SNP, before the last election, said they would review IR35 the Chancellor, Sajid Javid, promised that the Conservative Government would have an IR35 Review.

After the election they are having an IR35 review. However, they said it is only a review to see how it should be implemented more efficiently.

This from the Chancellor, who, when he was Managing Director at Deutsche Bank urged the Government to ‘repeal the silly IR35 tax’.

This report is coming out mid-February so there is not much time for the Government to know the IR35 disaster for companies and contractors alike that is looming.

Do contractors trust the promises they are getting from HMRC and the Government

It also makes contractors less trusting of promises from the Government and HMRC.

HMRC’s and the Government’s promises seem like the promises made to Macbeth to the three witches. They are not what they appear to be.

They are all based around a dodgy HMRC IR35 test which seems to be able to get whatever result you want.

And we know what results HMRC want.

This is a big reason why so many contractors are not just meekly co-operating. It’s the reason so many older contractors are taking early retirement.

Degree of IR35 Disaster for Companies becoming clearer

It’s become clearer day by day what a major catastrophe is building up. We know that this IR35 disaster for companies will be a major one.

And the main media like the newspapers and TV really don’t have an inkling of the size of the problem building up here. And all over a tax that HMRC say will bring in less than the equivalent of a tenth of a penny on income tax.

The Government seldom acts on demands from contractors.

But will our biggest companies, now they can see the disaster looming, lobby the Government to get the IR35 rules changed?

We shall see in the coming weeks.

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