Off Payroll: Government urged to ‘fix or ditch’ the flawed IR35 reforms

A leading contractor site has called for lawmakers to urgently fix flaws in the Off Payroll legislation, or ditch the reforms altogether.

Dave Chaplin from ContractorCalculator says it is time for the Government to recognise the damage the changes are doing to flexible working and UK businesses.

Background to IR35 and the Off Payroll rules

IR35 itself has been on the statute books since 2000.

The main aim of the original legislation was to discourage individuals from working via limited companies while providing services in the manner of ’employees’, rather than as businesses on their own account.

Contractors working through their own companies self-certified their IR35 status.

Unsatisfied with the effectiveness of IR35, new ‘off payroll’ rules were introduced into the public sector in 2017, and the private sector in 2021.

In a radical change, these IR35 reforms placed the onus of determining employment status onto clients, and gave them the tax liability too.

What is wrong with the Off Payroll rules?

Everyone involved in the contracting world is familiar with the deficiencies of the Off Payroll rules.

From HMRC’s unreliable employment status tool (CEST), to poorly drafted legislation which forces clients to blanket ban limited company contractors rather than take on the risk of incorrectly determining a worker’s employment status.

The Fix or Ditch campaign focuses on three specific flaws…

1. Double-taxation

Dave Chaplin, CEO of ContractorCalculator, has long campaigned on IR35 issues points to the bizarre effects of the double-taxation flaw.

He says the flaw overtaxes firms, making them pay almost four times the tax that should be due, but also opens a huge tax hole in the legislation.

Chaplin told us: “The decision on the workers’ status made by the client is just an opinion and not binding in law. Nothing can stop a contractor from claiming (with good reason) that an engagement is “inside IR35” even after they have been paid gross as “outside IR35”.

The bizarre result is that the individual pays zero tax, because the money they receive would then be net of tax. The client then has to effectively pay the tax bills of both parties, which is unfair and is one reason we see the refusal of firms to engage with highly talented freelance workers who run their own businesses.

“It’s unclear how HMRC would seek to unravel this; they cannot enter into multi-year litigation battle with both parties by arguing that the engagement is “inside IR35” with one and “outside IR35” with the other.

“This multi-billion pound tax hole is a direct result of HMRC choosing to draft the legislation in a manner which results in double-taxation. Instead, they could get no tax.”

Chaplin is calling for amendments to be tabled in the next Finance Bill

2. Tax injustice for recruiters

Although recruitment agencies may have done nothing wrong, they can still be held responsible for another company’s crippling tax debt, due to deficiencies in the way the legislation was drafted.

The implementation of private sector changes in April 2021 included the creation of a “Status Determination Statement” or “SDS”.

This document is created by the hirer and distributed to relevant parties in the supply chain, such as a recruitment agency. To be considered valid, the SDS must contain justifiable reasoning for its conclusions and have been produced with reasonable care.

The purpose of the SDS was twofold: to ensure that agencies are held accountable for tax liabilities when the determination is “inside IR35,” indicating that earnings must be taxed as employment, and to prevent agencies from disregarding opinions and paying contractors gross.

However, an issue arises when an SDS is deemed “outside IR35,” indicating that the agency is still held responsible for the tax bill if HMRC disputes the original decision. This situation is unreasonable, as the agency has no control over the initial status determination.

Chaplin says: “This is the easiest of legislative fixes, via a minor amendment to the existing legislation, to ensure the tax liability only passes down the chain if the client issues an SDS which states ‘Inside IR35’.”

3. Toothless appeals

When a client produces a Status Determination Statement for a contractor, they are under no obligation to provide any detail, nor is there an independent appeals process – as was promised when the Off Payroll rules were rolled out.

Instead of an independent process, there is a client-led dispute resolution process. This means clients simply mark their own homework!

Whilst the lack of access to justice for individuals is unfair, Chaplin says that this issue isn’t as simple as the others to solve and will require some considerable expertise to unravel, and suggests the solution is designed by a group external and independent to HMRC: “Given the inherent mess created by the legislation which was badly designed and implemented by HMRC, I don’t subscribe to the idea that they are the best ones to solve this issue.

“The historic consultation process led by HMRC failed in this instance – the issues were known before, and they were ignored. As the debacle of the Loan Charge demonstrates, HMRC is not quick to admit its mistakes. Ministers should create their own group of experts to solve this one, perhaps chaired by an independent tax tribunal judge.”

What can you do to help?

ContractorCalculator urges contractors, agencies and businesses to get in touch with their MPs to highlight these flaws and tell them the direct impact it has had on them and their livelihood.

To find out who your MP is, and their contact email address, try this link:

https://members.parliament.uk/FindYourMP

You’re also welcome to use this handy “Fix it or ditch it” PDF.

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