HMRC IR35 Contractor Update
According to the latest HMRC IR35 Contractor Update only 10% of contractors who should be paying tax under the off payroll rules are currently doing so. They don’t intend that this should continue This is one reason HMRC are changing the IR35 rules in the private sector from April 2020.
Contractor Questions on HMRC IR35 Contractor Update
- What is the main change to the IR35 rules?
- What is the intent of the new IR35 rules?
- What percentage of contractors are paying proper rate of tax?
- How does HMRC test contractors for IR35 tax?
- Is the HMRC IR35 test accurate?
- How will the Government get the 90% IR35 compliance they seek?
- When will the Government enact fresh IR35 legislation?
What is the Main Change to the IR35 Rules
The main change is that companies who hire contractors will now be responsible for determining a contractor’s IR35 status. This is called an Employment Status Determination. Whoever, pays the contractors, i.e. the agency or umbrella company will be responsible for paying the contractor’s PAYE tax and National Insurance.
According to the latest HMRC IR35 Contractor update “The off-payroll working rules can apply if a worker provides their services through an intermediary, which is usually the worker’s own personal service company (PSC).
What is the Intent of the New IR35 Rules
“The rules make sure that individuals working like employees, but through their own limited company, pay broadly the same tax and National Insurance contributions (NICs) as individuals who are employed directly.”
The problem, according to HMRC is that “Currently, an individual with an income of £50,000 who works through their own company, but doesn’t follow the rules, will contribute around £6,000 less (through tax, National Insurance and employer’s NICs) than somebody doing a very similar job as an employee. This includes employer NICs contributions of around £5,000. “
Now for the HMRC bombshell.
What Percentage of Contractors Are Paying Proper Rate of Tax
“HMRC estimates that, outside of the public sector, only one in 10 people who should be paying tax under the current off-payroll working rules are doing so correctly. These reforms will ensure the right amount of tax is collected. This will level the playing field between those who were applying the rules and those who were not.”
HMRC say that 90% of contractors who should be paying tax like an employee are not doing so. Yet their own Check Employment Status for Tax tool (CEST) only shows 31% of contractors who sit the test to be inside IR35.
Yet they say that 90% of contractors are non-compliant in this area. As they say themselves, the IR35 rules have not changed – just who is responsible for a contractor’s IR35 status.
So, if they are to get to 90% of limited company contractors paying employee taxes from 31% then something has to change.
How Does HMRC Test Contractors for IR35 Tax
They say that they will update their flawed CEST tax later this year. HMRC should have got an independent body to create this test. They should have recused themselves from it as they are an interested party.
However, they decided that, despite them losing heaps of IR35 tribunals to contractors, that they knew best. It doesn’t sound as if they are going to amend the CEST test to make it fairer. It sounds as if they are going to make it so that it catches more contractors.
Is the HMRC IR35 Test Accurate
The details of contractors who have been cleared by Employment Tribunals have been fed through HMRC’s IR35 test.
The test found them to be inside IR35 when the tribunals found them outside.
However, this alone will not take them from 31% of contractors caught by IR35 to 90%.
How Will the Government Get the 90% IR35 Compliance They Seek
The only way to bridge this gap is for the Government to enact fresh contractor bashing legislation. That’s what seems likely.
According to Boris Johnson and Sajid Javid in he Queen’s Speech “We will increase fairness and and flexibility in the labour market by stopping employers and workers experiencing significantly different outcomes from flexible forms of working.”
That sounds like they DO want to legislate again to make those 90% non-compliant contractors pay up.
When Will the Government Enact Fresh IR35 Legislation
Contractors have just had a stay of execution in this area by Boris Johnson cancelling the Budget in November as he wants an election in December.
However, this will be a very brief stay of execution. If he can’t get an election, and the signs are he won’t, Boris Johnson is likely to re-instate the Budget. Even if he doesn’t, there is like to be a Budget soon after the election.
And that will finish the contracting profession, as we know it, for good.
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