Chancellor Kwazi Kwarteng’ IR35 Changes
Why are Contractors Being Called Tax Dodgers?
Why did the Government Bring in IR35?
What are Disguised Employees?
What was David Cameron’s Position on IR35?
What Did Kwasi Kwarteng Do About IR35?
What Did the Times Think of the Chancellor’s Position on IR35?
Why are Contractors Different from Employees?
What do Liz Truss and Kwasi Kwarteng Think About Contractors?
What Happens Next for IR35 and Contractors?
Why are Contractors Being Called Tax Dodgers?
Contractors are once again being attacked in the press as tax dodging avoiders. Specifically, it is Patrick Hosking in The Times newspaper who criticises Kwarti Kwaseng for removing the 2017 and 2021 IR35 changes which took the decision on the contractors’ tax status out of the hands of contractors and into those of their client companies.
This is despite those changes having been a disaster for companies.
Why did the Government Bring in IR35?
It was an article by The Times newspaper which caused IR5 in the first place.
In 1999 The Times ran an article saying that companies and contractors were avoiding tax by having the employee quit the company on a Friday and start again as a contractor on the Monday doing the same job in the same place and even sitting at the same desk.
Of course this was an abuse. The companies were gaining, the employees / contractors were gaining but the taxman was losing.
What are Disguised Employees?
As always, when the press blow things like this up Governments feel they have to do something – and Tony Blair decided to put IR35 in place to root our these disguised employees.
This was rightly so. They were definitely disguised employees. It was taking the Michael.
However, IR35 caught more than those contractors in its net. Many contractors who had been contracting for years got caught in the IR35 net.
Contractors decided themselves if they were caught by IR35 or not. They decided their own status.
Even though the Labour Government admitted that IR35 had caught more freelancers in its nets than just those weekend job swappers, they didn’t change it.
They saw a nice opportunity for getting extra tax money from them. They saw them as weak and believed there would be no fallback for grabbing much of their income.
What was David Cameron’s Position on IR35?
In 2010, David Cameron promised that he would look at IR35 again if he got elected.
He did get elected and he did look at IR5 again and decided not only to keep it but strengthened it too hiring an extra 36 HMRC staff just to monitor IR35 better.
This was just another example of politicians pulling the wool over contractors’ eyes. I noticed that during her campaign to become Tory leader, Liz Truss said several times that she would ‘look at’ several issues again.
What Did Kwasi Kwarteng Do About IR35?
However, out of the blue, Kwasi Kwarteng decided to abolish the IR35 changes put in place in 2017 and 2021 by Cameron and Theresa May as part of his tax reform budget.
Previously all Labour and Conservative Governments had made IR35successively more restrictive on contractors.
It had become a complete mess.
What Did the Times Think of the Chancellor’s Position on IR35?
In today’s Times newspaper Patrick Hosking attacks Kwarteng saying “Kwarteng’s measures seem to flout other traditional Treasury norms too. The U-turn on the IR35 crackdown, the campaign to stop consultants and contractors improperly categorising themselves as self-employed to avoid tax was one. It is the unending job of the Treasury to plug tax leakage, even in the face of special pleading”.
Wow!
Why are Contractors Different from Employees?
This is a problem that contractors and consultants have. Why they are different from permanent employees is not readily understood.
What those calling them tax avoiders see is someone who might well be doing the same job as an employee. That’s all their critics see.
However, they may do the same job but they operate in a very different way.
They can be chopped at a moments notice and they get no redundancy pay.
They get no sick pay, holiday pay and they have to pay their own National Insurance and they get no pension. They get no promotions and there’s no share options for them.
I never met a permanent employee who had to use and Accountant.
Contractors may also have weeks or often months out of work with no pay. They are taking risks that permanent employees don’t have to take.
They often benefit companies by bringing in new ideas that they have seen elsewhere and mentoring less experienced employees. The can usually do whatever they have to do quicker than an employee.
What do Liz Truss and Kwasi Kwarteng Think About Contractors?
At least Liz Truss and Kwasi Kwarteng understand why contractors are so useful to companies and the UK economy.
Companies know best what the best mix is between the use of contractors and employees. Being forced to alter what they see as the optimum mix of contractors and employees is not good for the company or the country.
The fact that companies then had to decide the IR35 statuses of their contractors with financial penalties if they got it wrong, forced companies to artificially inflate the percentage of employees against their better judgment which was not good for their businesses – or for the UK economy.
What Happens Next for IR35 and Contractors?
It’s great news for UK contractors that the 2017 and 2021 IR35 changes have been removed and contractors can now decide their won IR35 statuses again.
However, the Government is under pressure because of the run on the pound and higher debt repayment interest rates and may succumb to pressure to amend the Chancellor’s budget to support the pound.
There’s also newspapers and journalists on the sidelines saying that this allows contractors to “improperly categorise themselves as self-employed to avoid tax”.
Let’s hope Liz and Kwasi stick to their guns.
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