Ten Reasons Why IR35 Will Never Work

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Arguably the best way for a government to stimulate economic growth is to simply stop legislating, stepping aside and allowing businesses to embrace the benefits of a flexible workforce and giving contractors and freelancers the freedom to simply contract. 

The HMRC, as directed by the Government is meddling with IR35 and who should have the “freedom to contract” without interference.  Renewed calls for the tax to be scrapped on the basis that it actually damages business at a time when more than ever the UK needs a flexible, competitive, entrepreneurial workforce have fallen on deaf ears.  Speedy would like to outline the ten reasons why it thinks things would be better if IR35 was simply set aside. 

 

1. Solving a problem that no longer exists

IR35 was originally brought in to deal with the issue of “disguised employment” commonplace in the ‘90s when permanent employees could leave their job on a Friday only to return to the same office in the same role as a contractor on Monday. This allowed employers to hang on to their skilled workers without the financial commitment of hiring an employee and in turn the contractor could earn far more.

Whilst this was rife in the IT industry it no longer happens what with a changed supply/demand dynamic. 

2. IR35 is unworkable

IR35 is very complex tax law and only HMRC experts can apply it, of which there are only about 40 amongst HMRC’s 55,000 staff.  Contractors exist in their thousands and have become increasingly savvy to ensure they avoid being caught by IR35.

3. Market forces make IR35 redundant

IR35 was designed to tackle ‘tax motivated incorporation’ pinpointing those workers who operate through a limited company but in reality are employees and should therefore be taxed as such. However, contractors tend to be paid much more than an employee and therefore pay more tax. HMRC does not seem to understand this. 

With the recent dividend changes reducing the tax differential between contractor and employee incentives to incorporate purely for tax purposes have been drastically reduced.  The motivation to incorporate purely for tax purposes have been much reduced effectively making IR35 redundant. 

4. IR35 tax yield based on false assumptions

HMRC believes that the deterrent of IR35 generates £520m in tax but in reality most well paid employees aren’t setting themselves up as limited companies simply because their employers don’t let them, not because they are put off by IR35 (indeed many are not even aware of the legislation).

5. The figures don’t make sense

HMRC is under the illusion that IR35 should raise an extra £430m in tax.  To achieve that sum it would mean hunting down 145,000 contractors earning £150 a day inside IR35 every year or catching 65,000 contractors working full time on £500 a day.

HMRC admits itself that it does not have the resources to police IR35 and catch this many contractors, even if they are disguised employees. This is even beofre the fact that IR35 is too complicated for many inspectors.

6. End-hirers do not pay NICs

One big issue that is often overlooked is that a contractor pays the equivalent of employee income tax and employers’ National Insurance Contributions (NICs) through their own limited company.  The end-hirer pays nothing if a contractor is caught inside IR35. Surely, if IR35 is going to be effective the end-hirer must take some responsibility as an employer and pay NICs as any employer would.

7. The UK tax system is anachronistic

The UK’s tax system is outdated. We have moved from an industrial age model of working to one that is geared around portfolio careers, gigging and freelancing which means we have seen a decline in employers’ NICs because freelancers do not pay this.

It also means that employers are paying less too as they are turning to skills on an as-needs basis, keeping their organisations agile and turning to freelancers and contractors when it suits them. That trend is growing with 1.9 million freelancers working in the UK today. The tax system needs to recognise this shift and move with the times.

8. Brexit

On June 23rd the UK voted to leave the EU.  This will bring a period of uncertainty and with many predicting Britain plummeting into recession. However with change comes opportunities for contractors. Leaving the EU is a massive one-off project that will impact on both the public and private sector.

Legislation can hinder and penalise a flexible group of workers who can help the UK through these uncertain times ahead.

9. A new digital tool is unworkable

HMRC is trying to achieve the unachievable in its bid to develop a comprehensive online IR35 test that provides a definitive result for contractors. It is part of its plans to reform IR35 in the public sector. However it is a naïve attempt to achieve the impossible.

Building a simple online tool can’t be done due to its inherent complexity. The finest legal minds haven’t been able to boil down decades of employment case law into an IR35 questionnaire that provides a binary result. One could say that the new test is doomed to fail.

 

10. Costs will rise

The Government is poised to reform IR35 for public sector engagements believing that HMRC is losing out on £400m in tax annually from 20,000 contractors who work in the public sector. It plans to move the onus of evaluating the workers IR35 tax status from the worker’s own company to the public sector body or agency / third party paying the company, who will be liable for collecting taxes using RTI.

This plan is inherently flawed.  Government services could be decimated with upto 80 per cent of contractors abandoning the sector rather than accepting a contract outside IR35 and losing about 20 per cent of their income. The Government could also lose out on around £115m in taxes and face an increase of £610m rise in costs per year for hiring the same workers on the payroll.

These were just three of the findings in a recent survey of 500 contractors.

 

In summary, no matter how often HMRC decides to review IR35 to devise more effective strategies for implementation, it would seem that the tax just doesn’t not work. It is a poorly thought through piece of legislation that was not fit for purpose when first announced, and it is designed to address a problem that no longer exists.

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