The taxman has been accused of manipulating IR35 so that contractors are considered guilty until proven innocent, overriding the rule of law whereby HMRC is required to discharge its own burden of proof to show that a contractor is caught by the legislation.
The Off-payroll working rules for public authorities have incentivised many public sector hirers to blanketly assume that their contingent workers are caught by IR35; a position that they will be reluctant to budge from unless the contractor can convince them otherwise beyond doubt. As a result, thousands of contractors are believed to have been forced into false employment and subject to wrongful taxation.
The way that the off-payroll rules are structured makes it so difficult for a contractor to secure a fair assessment. Although it’s not written in the legislation, it’s almost a deemed provision that contractors are to be considered caught until they have proven the contrary – or guilty until proven innocent.
Have off-payroll rules introduced ‘deemed provision by proxy’?
The notion that an individual can be deemed guilty until proven innocent is a contentious one. However, this hasn’t deterred HMRC, which has enjoyed success with its Accelerated Payment Notice (APN) scheme, whereby those believed to have engaged in tax avoidance schemes are required to pay penalties up front before being proven of wrongdoing.
There’s a strong argument to be made that, with the off-payroll rules currently governing the public sector, HMRC has created a new form of deemed provision by proxy which is resulting in false employment.
HMRC has effectively instructed public sector hirers to assume that all contractors are caught by IR35 unless the contractor can convince them that IR35 does not apply. This task is made even more difficult for the contractor by the fact that the hirer leaves themselves open to back taxes and penalties in every instance where they place a contractor outside of IR35.
Inevitably, the large majority of public sector hirers have taken the default position that their contingent workers are caught by IR35, imposing blanket rules which are destroying the livelihoods of many contractors.
The argument isn’t without substance. Contractors have left the public sector in their droves in response to hirers deeming entire contingent workforces to be caught by IR35. Not only this; a procurement manager in a Government public service disclosed the IR35 position held by management at his former place of work:
“It was the contractor’s responsibility to do that [assess their IR35 status], they took the stance that everyone was in scope unless they could prove otherwise.”
Off-payroll rules: ‘taxation by fear, not fairness’
There’s an imbalance in risk and reward between the hirer and the contractor as a key contributing factor: In the public sector, when a contractor is deemed to be inside IR35, the hirer is not the one paying the tax. In many cases, they aren’t even paying their employer’s National Insurance (NI) liabilities, as this is often passed onto the contractor by way of a reduced rate. So, the hirer has nothing to lose.
Compare this with the potential tax liability when HMRC challenges an ‘outside IR35’ evaluation, and it’s clear that the off-payroll rules are taxation by fear rather than fairness.
According to Ken Phillips, executive director of Self Employed Australia (SEA), the arrangement mimics the punitive approach taken by the Australian Taxation Office (ATO):
“The structure of the legislative powers of the ATO is reverse onus of proof. The ATO makes a decision or ‘forms an opinion’, and that decision or opinion is considered law. The taxpayer’s task is to disprove the ATO, which is under no obligation to explain or defend its position.”
The ATO’s abuse of its powers under this regime has led to it being accused of fraud. As Phillips points out, HMRC could soon follow suit: “The irony is that, while we are campaigning for a tax structure which more closely resembles that of the UK, HMRC seems insistent on replicating a tax system which has caused so much controversy in Australia.”