Why IR35 Changes are Deemed 'Aggressive'?
Published: 08/10/2018
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We are writing this article for employers and recruitment agencies to explain the changes to IR35 and their implications. The controversy creates miscommunication, which results in conflicts between you and the contractors. The best way to proceed is with empathy. Therefore, we will help you understand the impact of this reform on the other party so you can tailor your future communication accordingly.
IR35 is the legislation aimed at tackling tax avoidance by workers supplying their services to customers through an intermediary. It has faced significant criticism since its initial implementation in 1999. Industry bodies, tax experts, and the business community have described it as poorly conceived and executed. Furthermore, it is believed to create unnecessary costs and stress for genuine, honest individuals regarding the work they provide. Although it was highly unpopular before, the announcement in early 2020 to extend it to the private sector has sparked a new wave of outrage.
The government promised support to contractors and has delayed the legislative changes due to the global pandemic. However, none of this has eased the impact. In fact, doubling down and providing employers and recruiters with a year to adapt, while not offering similar leniency to the contractors, has only caused more controversy. Most importantly, it has created a rift among all parties involved, shaking up the market.
While IR35 previously covered only public-sector workers, HMRC has now extended it to the private sector. Unsurprisingly, this move has attracted even more criticism. Qdos Contractor, a tax insurance provider, has urged HMRC to reconsider its “aggressive” approach to IR35 tax reforms. They label it a threat to self-employed workers during a time when uncertainty surrounding a no-deal Brexit already poses significant challenges for independent professionals.
The global pandemic has only worsened the situation, resulting in many companies folding. It prompted thousands of senior employees to seek contracts instead of full-time employment. Our marketing manager confirmed they have been contracting from May 2020 to October 2020 due to significant competition for permanent roles and the difficulty of securing one quickly while needing to pay bills. Like many during the pandemic, they lost their source of income because of COVID-19, which led to company bankruptcies. In other words, although it was delayed, the roll-out of the IR35 changes was very poorly timed.
As The Register reports, these reforms are largely regarded as the government pressuring contractors for more money. Generally, the responsibility for determining IR35 status has been shifted from the contractor to the hiring company. In a survey of 650 contractors, it was found that 94% believed the government viewed the self-employed as a vulnerable target.
Qdos Chief Executive Seb Maley pointed out that, “Contractors understandably feel targeted by the government and have been largely impacted by last year’s public sector IR35 reform. These individuals want a tax system that actually works for the self-employed.” Maley explained that the reforms are occurring at a time when large companies continue to underpay taxes. This understandably makes contractors more resentful.
We have investigated these claims and discovered that, according to figures shared by gov.uk, large businesses owed a total of £35.8 billion in tax in 2021, of which £11.5 billion is suspected to be underpaid. Curiously, instead of examining potential foul play in the UK, HMRC is casting blame on foreign businesses, portraying them as the primary tax offenders. Consequently, HMRC declares that the tax process is complex for claims to be reclaimed. According to Steven Porter, Head of Tax Disputes and Investigations at Pinsent Masons, the scrutiny of overseas corporations underpaying taxes is likely to intensify in the coming years. However, independent UK-based contractors are being penalized right now, with little to no investigation taking place.
Another blow dealt to contractors by HMRC was giving private-sector employers a year to adapt to the IR35 changes. The ‘light touch’ approach meant that businesses would not be penalised for accidental non-compliance for a year. However, the contractors would be held entirely responsible and thus susceptible to paying a penalty from day one.
While some recruitment companies had begun adjusting their processes accordingly right away, others were in no hurry. This was mainly because they knew they were clear for another year. Working with the latter meant the contractors wouldn’t receive the needed support. Additionally, the agency wouldn’t contribute had they been penalised by the HMRC. Unfortunately, such behaviour turned out to be alarmingly frequent, damaging the contractors' relationship with the recruiters. The contractor survey conducted by The Global Recruiter provided a numeric estimate of this rift: 22% of the surveyed contractors trust their hirers to make the correct IR35 assessment.
The government claims to have taken steps to assist contractors in navigating the IR35 changes, yet this is debatable. Many contractors are incorrectly classified as being inside IR35, which results in them being taxed like employees without receiving any of the associated benefits. The official tools and guidance provided have also proven to be highly inaccurate, which has contributed to the contractors' overall resentment.
The IR35 changes are critical for contractors and directly affect their livelihoods. However, the government has not provided a simplified explanation or offered a designated training program. Important IR35 factors and essential information are highlighted, written, and published by independent sources- much like this article.
Since they are not government-approved, the mentioned articles may be incorrect or cause further confusion. If a contractor is penalised for following advice found online, they cannot dispute the charge or sue the source. A safer option would be to reach out to accredited IR35 specialists, as this would provide a degree of reassurance. Of course, a contractor could always invest their personal time in studying the legislation clauses in depth on their own. However, this would understandably be a time-consuming and risky endeavor.
The claims that the government supported contractors by providing them with adequate self-assessment tools were quickly dismissed. These tools were considered ineffective. The government’s own Check for Employment Status for Tax (CEST) tool has been criticised as inaccurate. A former HMRC inspector even referred to it as “hopelessly unreliable and biased,” stating it was not fit for purpose. In other words, while it is heavily implied that contractors are empowered to self-assess, the reality is quite different.
Since the employing party wouldn’t face punishment for a year of non-compliance, many employers were not eager to start rethinking their processes either. This effectively meant contractors had to navigate this situation themselves and risk penalties if they incorrectly self-assessed. Alternatively, they could pay for an IR35 consultancy. With the increase in demand, the latter led to a rise in service charges. In other words, the contractor would always find themselves at a disadvantage.
Recruiters play a crucial role in shaping the future of the contractor market. If the government fails to provide support, recruiters are expected to step up and take the lead. They have the potential to become trusted advisors and intermediaries between contractors and employers. Having faced repeated failures, contractors harbour little faith in receiving assistance. This presents an opportunity for recruiters to establish themselves as dependable allies. Not only will this repair the relationship damaged by the legislation, but it will also strengthen it moving forward.
We understand that the new responsibilities contractor recruiters face can be daunting. Therefore, after assisting recruitment firms for over a decade, we have adjusted our software to help with the IR35 changes. Starting in 2021, our approval module is no longer solely based on time rates. It can now be utilised based on deliverables, which is a critical factor when HMRC assesses whether a contractor is IR35 compliant. However, we want to remind you that Timesheet Portal is NOT an IR35 assessment tool.
Our platform was originally created to assist contracted workers and their employers by taking the invoicing process online instead of relying on fax machines. We have been expanding in the recruitment sector due to various needs, complaints, and challenges faced by all parties involved. This is why it is only natural for us to implement changes that address some of the significant shifts in the industry. At Timesheet Portal, we believe that while the changes in legislation may pose an inconvenience now, they could signal the beginning of a new era in contractor recruitment.
The IR35 changes are controversial for many reasons, including their timing and the perception that large companies are evading accountability due to insufficient guidance from the government. Additionally, hefty fees are imposed for non-compliance. However, these changes will not be revoked, so the industry must adapt. The IR35 has created a rift between contractors and recruiting parties; however, it also presents an opportunity to strengthen existing relationships.
As a recruiter, you should approach the matter with empathy. If possible, help identify whether someone falls inside or outside of IR35 and educate both clients and contractors about it. Prioritising their interests and needs will establish you as a trusted advisor, enhancing your reputation and credibility. Remember, your firm thrives by helping others grow.
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Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal/financial expert in this area before acting on any of our advice.