Menace Tax – IR35 tax is a creeping menace for IT Contractors

Menace Tax
Menace Tax

Menace Tax

IR35 is an absolute menace tax.

When IR35 first came onto the statute book in 1999 it was to cure a problem identified by the media.

That problem was that companies were laying off employees on the Friday and taking them on as contractors on the Monday.

These people were termed by the Government ‘disguised employees‘.

We know how Government‘s of any hue feel the need to ‘do something‘ every time there is a media ‘scandal‘.

They created this menace tax because of it.

Disguised Employees

However, not only did IR35 catch these ‘disguised employees‘ (except when they were senior management at HMRC), it also caught many other contractors in its net.

That‘s why the Umbrella Company was set up.

However, there are still more contractors with Personal Service Companies than there are in Umbrella Companies.

It‘s reckoned that there are 200,000 Umbrella Company contractors.

It is reckoned that they pay an average of 10 grand a year more in tax and NI contributions than Personal Service Company contractors pay in dividends and tax.

That nets the Government and HMRC an extra £2bn a year.

IR35 Panel Set Up

After promising the Professional Contractors Group, IPSE, that they would ‘look at‘ IR35 if they got elected the Conservative-led Government set up a panel which recommended that IR35 should be kept. Otherwise, they said, there was the danger that contractors would dump their umbrella companies. They would operate through personal Service Companies.

The Government accepted this recommendation.

However, we can see which vehicle for contractors that the Government prefers.

We can see which vehicle brings in HMRC and the Treasury more money.

Therefore it would be in their interests to have more contractors in umbrella companies and fewer in Personal Service Companies.

Clearer IR35

Part of the outcome of the recommendations was that they should set up an IR35 panel to make IR35 clearer.

To this end, they enlisted the help of the IPSE. They came up with IR35 Business Entity Tests. They would guide contractors as to whether they are inside or outside IR35.

Unfortunately HMRC decided, off its own back, to come up with the marking system by themselves for each of the tests. They would also decide what mark you had to get to be at High, Medium or Low Risk of being caught by IR35.

IR35 Reader Poll

We asked our readership to take the test for this menace tax.

We then asked them to give us their answers as to whether they were at High, Medium or Low Risk of being caught by IR35.

The poll results, shown here Four out of five IT Contractors caught by IR35 were very instructive.

This means that a law brought in to catch ‘disguised employees, who went from being a permie to a contractor in a weekend at the same firm is now catching 80% of contractors in its net.

And the law hasn‘t changed one iota since its inception in 1999.

Personal Service Companies

So, how can this be?

One feels that there is a campaign of terror taking place to chase contractors out of Personal Service Companies. HMRC wants them in umbrella companies.

HMRC is now being proactive and sending out letters telling contractors to prove that they are at Low Risk of being inside IR35.

They‘ve got a month to do so or risk an investigation.

Take the IR35 Test

The letter tells contractors to take the online test and provide proof that they have enough points to be at Low Risk.

This means that the IR35 Tests, which have no basis in law, are being used to frighten contractors into believing that they are caught by IR35. Legally they may not be.

HMRC know this is not a definite test and certainly not enshrined in law.

It beggars belief that 80% of all IT Contractors are now caught by a law set up to catch ‘disguised employees‘.

Contractors won‘t sleep very easily in their beds at night knowing that heir score shows them at High or Medium risk of being inside IR35.

Clever Use of Risk

The use of the word ‘Risk‘ is quite clever.

HMRC don‘t want to say it is definitive – so risk is a good word to use.

However, the tests will serve their purpose of frightening contractors out of Persona Service companies and into Umbrella Companies.

That‘s good news for the Government and HMRC who will get more tax without any change in the law.

It‘s also good for Umbrella Companies.

Bad News for IT Contractors

However, it is not good news for IT Contractors many of whom are legally outside IR35 – but maybe not according to the tests.

Does anyone really believe, now, that the IR35 panel has achieved its objectives and made IR35 clearer?

Or has it been deliberately used to muddy the waters still further to make more contractors believe that they are ‘at risk‘ of being inside IR35?

Is this a menace tax?

What do you think?