IR35 news archive 2021
All of IT Pro's IR35 coverage from the year
12/01/2021: UK businesses still vastly unprepared for IR35
Businesses are still not fully ready for the rollout of private sector IR35 reforms despite the changes only months away and in the pipeline for several years, research claims.
More than half (52%) of in-work contractors are yet to be assessed for IR35 despite the rules coming into force from 1 April 2021, according to a survey by IR35 Shield. Underlining this lack of preparedness, almost a quarter (23%) of firms are bypassing the need for checks by imposing a blanket ban on limited company contractors who may fall under the IR35 rules.
Businesses are also set to face a ‘talent drain’, with many contractors expected to drastically alter their behaviour once the IR35 reforms are active.
Only 32% of the more than 3,000 contractors who responded to the survey are confident they’ll remain with their current client post-April. For 57% of businesses, meanwhile, at least half of their contractors are likely to leave their roles.
Most contractors themselves will avoid ‘inside IR35’ contracts, 65%, with 72% saying they’ll increase their rates to compensate for the additional tax obligations.
“We have just a few months until Off-Payroll takes effect in the private sector and it seems that half of the market is leaving compliance until the very last minute,” said the CEO of IR35 Shield, Dave Chaplin. “This is likely to cause some severe repercussions for hirers and contractors.”
“Blanket bans on limited companies are an expensive way for firms to hire less talented professionals, whilst handing a competitive edge to their competition. Firms need to realise that if they apply best practice and with the correct contracts in place, they can continue to hire the best contractors with confidence.”
Chaplin added that companies using HMRC’s widely-derided check employment status tool (CEST), or those applying blanket rules to negate their obligations will encounter disputes and recruitment struggles. Many of these firms would be sent “to the back of the queue” when contracts decided on their next contract.
The research showed 52% of firms are using CEST, although 41% will dispute an ‘inside IR35’ result hoping that the decision is overturned. This is likely due to a historic success rate of 50% when the tool’s determinations were legally challenged.
Respondents largely concurred with this view, with 71% saying CEST doesn’t reflect the law on employment status and 75% believing the tool to be inaccurate. Damningly, only 2% said they actually trust the tool.
The extension of IR35 rules to the private sector was originally set to be introduced in April 2020, having been in force for public sector organisations since 2000. These plans were delayed by a year, however, due to the disruptive effects of COVID-19, with businesses still wholly unprepared for the changes this time last year.
18/06/2020: MPs green-light 2021 rollout of IR35 reforms
Amendments to the Finance Bill have now been approved by MPs, meaning that private sector IR35 reforms are on-course to be rolled out next year.
The government was previously urged to delay the extension of IR35 reforms until 2023 due to the long-term effects of coronavirus. This is after ministers first delayed the introduction of the rule changes affecting contractors as the pandemic began to grip the economy earlier this year.
New clause 1 and new schedule 1, however, were passed without opposition during the committee stages of the Finance Bill's passage through parliament.
This means the private sector reforms have been given the go-ahead to be rolled out in April 2021, one year after they were originally due to be introduced.
The off-payroll working rules have been in place since 2000 for public sector bodies, and aim to ensure individuals working like permanent employees pay the same income tax and National Insurance contributions.
Critics have suggested the rules discriminate against the self-employed because contractors cannot legally enjoy the same benefits as full-time workers, including sick pay.
Speaking during the passage of the Bill, financial secretary to the Treasury Jesse Norman said the reforms were successful in the public sector, and that changes to the original proposal have already been made following consultations with stakeholders.
Seb Maley, CEO of IR35 specialist Qdos, commented that the news is hugely disappointing, albeit unsurprising.
“If mismanaged, these changes pose a real threat to contractors, the recruiters who place them and the businesses that engage them," he said. "It’s therefore vital that companies impacted by IR35 reform continue their preparations and ensure they are in a position to make accurate IR35 decisions well in advance of the implementation date.
“Firms yet to consider IR35 need to immediately, while companies that banned contractors in anticipation of the reform need to understand that it can be managed with the right approach.”
20/05/2020: MPs ignore calls to delay IR35 reforms until 2023
UK MPs have ignored calls to delay the implementation of IR35 tax reforms by two years, which means the controversial rules are one step closer to being introduced in April 2021.
Conservative MP David Davis had campaigned for an amendment to the Finance Bill that would see IR35 be delayed until 2023/24, arguing that the "effects of the pandemic are going to be felt for longer than one year."
"Contractors are going to be hit with unnecessary cost, confusion, and uncertainty, just as many are getting back on their feet after coronavirus has wreaked havoc in the economy," Davis has said.
However, despite the publication of a House of Lords report which called for a "complete rethink" of the proposed legislation, MPs failed to vote on the amendment on Tuesday, meaning the changes are one step closer to being introduced in April 2021 as the bill moves to the committee stage within parliament.
Speaking in Parliament yesterday, Jesse Norman, the financial secretary to the Treasury said it was “hard to see any genuine rationale” for delaying the reform beyond the deferral to April 2021, announced already due to COVID-19.
"A delay would have very significant drawbacks," he said. "It would not address the intrinsic unfairness of taxing two people differently for the same work, it would extend the disparity between the private and the public sectors, and it would come with a significant fiscal cost, which other taxpayers up and down the country would have to make up."
Commenting on the move, Seb Maley, CEO of IR35 tax advisory firm Qdos, said he was not surprised the government had refused to listen to calls for a delay: "It has buried its head in the sand when it comes to IR35, continually ignoring compelling arguments that call for a rethink of the legislation.
"The coronavirus crisis also means raising tax receipts has become a priority for the Treasury - even if that means contractors may be wrongly forced into 'zero-rights employment' as a result of the reforms."
27/04/2020: ‘Problem-ridden’ IR35 rules should be overhauled, Lords conclude
IR35, which is set to be extended to the private sector from April 2021, has not worked properly ever and should be fundamentally reformed to fix inherent unfairness, an influential parliamentary committee has found.
Although the rules were set to come into force this month before the COVID-19 pandemic derailed the plans, the House of Lords finance sub-committee found they were riddled with problems, unfairness, and unintended consequence.
Among several shortcomings, the government has not fully analysed the unintended behavioural consequences that may result, including contractor layoffs and changes in hiring patterns, according to the inquiry.
The committee has called on the government to implement the recommendations of a major review into taxation practices, dubbed the Taylor review, by ensuring that the tax burden and rewards are equally applied to the entire workforce, including contractors.
“Our inquiry found the rules to be riddled with flaws and unfairnesses,” said chair of the Lord financial bill sub-committee Lord Forsythe, writing for Politics Home.
“The Government has overlooked the potential impact on the wider labour market, and particularly the gig economy. The Committee also heard that many companies were already making blanket status determinations and laying off contractors in anticipation of the implementation of these new rules, despite their delay.”
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The committee was particularly concerned with the ‘halfway house’ nature of the legislation, which left employees having to commit in the same way as full-time employees but without enjoying the benefits that come with employment.
This reality, Lord Forsythe continued, flies in the face of the recommendations of the Taylor Review that the taxation of labour should be made consistent across different forms of employment while the rights and entitlements of the self-employed should be boosted.
The 67-page inquiry found the government has not learnt lessons from the way the legislation was applied in the public sector, with the need for an independent review to be urgently established to analyse the impact on the labour market.
Businesses are also being unfairly expected to determine the status of its contractors using a complex and fact-specific test. The check employment status tool (CEST), which has come under heavy criticism for its inaccuracy, falls well short of standards expected.
HMRC is, in effect, privatising tax compliance by enforcing a regime which it has struggled with for the last 20 years, buy making large and medium-sized businesses responsible for checking the status of their workers.
The committee has recommended that the government announce in six months from now whether it will continue with the majority of the proposals, or whether it plans to tweak any aspect of the legislation.
23/04/2020: House of Lords calls for 'indefinite delay' to IR35
The House of Lords has provided the Treasury with a list of concerns it has regarding the rollout of the IR35 tax legislation, which is scheduled to come into effect on 6 April 2021.
The letter, sent on 22 April 2020, welcomed the government's decision to push the reforms into next year, however, argued that they should be delayed indefinitely until concerns can be addressed.
Chair of the Finance Bill Sub-Committee, Lord Forsyth of Drumlean, addresses such issues as non-compliant umbrella companies, the reliability of the Check Employment Status for Tax (CEST) tool, and the success of the 2017 introduction of IR35 reforms to the public sector.
"As you are aware, the Sub-Committee has received a significant amount of evidence about the administrative burden that the off-payroll working rules will place on business," the letter reads. "We also heard that preparing for the rules will impose substantial start-up and running costs. Witnesses reported that the combined cost for just six businesses has already been as much as £3 million."
"We were told that the reforms might result in contractors leaving freelancing, losing business, and facing a decline in pay rates, as clients pass down the additional costs that they would incur. And since the beginning of the COVID-19 crisis, stakeholders have written to us that of their fears that such losses will be permanent."
Contractors also told the committee that the coronavirus pandemic meant that they are unlikely to secure any business in the next few months.
Regarding the CEST tool, a system used to calculate employment status and widely regarded as being inadequate, the committee said: "We heard that CEST gives an answer in only 85% of cases, does not take sufficient account of factors such as mutuality of obligation, and is heavily reliant on subjective judgements.
"Several witnesses said that they had run tribunal cases through the tool, and found that it produced a different answer to the outcome of the tribunal."
Despite praising additional work on the tool in November, questions were still asked about whether it was reasonable to impose the responsibility of status determinations on businesses, and what steps the government will take in the coming year to further improve on the system.
"Many witnesses argued that the new off-payroll rules create unfairness because they identify individuals as employed for tax purposes without providing the benefits and protections that come with employment," the letter added. "There was concern that the reforms were proceeding before the Government had implemented the recommendations on employment status made by the 2017 Taylor Review.
"Witnesses did not feel that the new rules represented a sensible solution to challenges posed to the economy by new types of working. They were therefore disappointed that Government consultation on the new rules was narrowly focused, and suggested that a better approach would have been to consider new types of working from first principles."
The letter was sent to Jesse Norman, financial secretary to the Treasury. The government has been asked to respond within 10 working days.
18/03/2020: COVID-19 knocks IR35 reforms into 2021
The government has postponed the extension of its IR35 reforms to the private sector until April 2021 as UK businesses and freelancers struggle to grapple with the economic fallout of the COVID-19 pandemic.
Concerns were sparked last month when the government decided to roll out the reforms to the private sector from this April, despite pledging to pause the process and review its status during the 2019 general election.
Although businesses have spent the last few weeks to preparing for the changes, the application of IR35 has been deferred until April 2021 in light of the economic turbulence that’s followed the coronavirus outbreak in the UK.
“The government is postponing the reforms to the off-roll payroll working rules, IR35, from April 2020 to 6 April 2021,” the chief secretary to the treasury Stephen Barclay told MPs in the House of Commons.
“The government will therefore not move the original resolution tonight but will shortly table an additional resolution confirming that we will reintroduce the off-roll payroll working rules provisions by amending the bill, with a commencement date of 6 April 2021.”
“This is a deferral in response to the ongoing spread of COVID-19 to help businesses and individuals.”
“This is a deferral, not a cancellation, and the government remains committed to reintroducing this policy to ensure people working like employees but through their own limited companies pay broadly the same tax as those employed directly.”
From April 2021, instead of April 2020, employers must determine the status of its freelance and contract workers, and whether or not they should be classified as regular employees.
Many of the wider concerns centred around HMRC’s check employment status for tax (CEST) tool, and its mere 50% success rate. The new enforcement date of April 2021 will likely give not just businesses and freelancers, but the government breathing room to get the extension of the IR35 rules right.
"“This postponement will be a welcome relief for contractors who are facing great uncertainty as a result of the current COVID-19 pandemic," said head of legal services at Brookson Group, Matt Fryer.
"Contractors should not be complacent, however, this is not a free pass to use a Personal Service Company for a role that has now been captured inside IR35.
"The new date will allow businesses who have yet to adequately prepare for the IR35 changes enough time to take appropriate action, with much clearer guidance from HMRC than they have had previously.
"Hopefully some of the businesses who have implemented knee-jerk blanket bans on contractors will also now have time to reconsider their strategy for ensuring access to flexible expertise."
The 2020 review, which detractors accused the government of rushing through, made a set of changes to the way the reforms would be implemented. Businesses, for example would not face penalties for inaccuracies during the first 12 months unless there was evidence of deliberate non-compliance.
The reforms were also due to be introduced with further signposting in official guidance, and more material to come including webinars, letters and workshops.
28/02/2020: Private sector reforms to kick in from 6 April 2020 after all
The government has been accused of rushing its review of prospective IR35 reforms, after promising to pause rollout during the 2019 election campaign, with private sector extension cemented for 6 April 2020 as originally planned.
Extending the IR35 tax reforms to the private sector, after they were first applied to public sector organisations in April 2000, has been planned for a number of years. However, the execution of these rules has come under considerable criticism.
These reforms were designed to address an issue whereby self-employed contractors avoid tax and national insurance contributions by funnelling earnings through a limited company and paying themselves through dividends. To avoid this scenario, the responsibility of assessing tax status shifts to the organisation.
The government has previously been accused of being too aggressive in its enforcement of IR35 rules, and HRMC’s check employment status for tax (CEST) tool has been savaged for its mere 50% success rate in identifying individuals’ tax status.
In light of this sustained criticism, the government announced a review on 7 January 2020. Nearly eight weeks later, this has now concluded, with the report suggesting the reforms should go ahead as planned albeit with a few tweaks to how the government handles them.
Among the changes, businesses will now not face penalties for inaccuracies during the first 12 months unless there is evidence of deliberate non-compliance. The reforms will now also be introduced with further signposting in official guidance, with more material to be published including webinars, letters and workshops.
"The government continues to believe that it is right to extend the reform to the off-payroll working rules to large and medium-sized organisations in all sectors from 6 April 2020," the review said.
"The government has listened to the concerns raised by stakeholders, and is changing its approach where appropriate to better support affected businesses and individuals."
Boris Johnson’s government is also making assurances around the fact that IR35 extension won’t be applicable to services provided prior to 6 April 2020, and that HMRC won’t use information gleaned from the implementation to open historical enquiries.
Hopes were raised among contractors when the government promised to pause and review the extension during the 2019 election campaign. This pledge, however, was only made after Labour and the Liberal Democrats each promised to suspend extension of the IR35 rules.
Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), branded the review “recklessly inadequate” and slammed the government for rushing it through in less than two months.
"The tweaks proposed by the review go nowhere near far enough. If anything, this tinkering shows the government knows the changes to IR35 will be immensely disruptive to business and contractors, but plans to forge ahead regardless," he said.
"These off-payroll rules will be catastrophic for the contracting sector and will do serious damage to client businesses and the wider economy.
"Many businesses are already scrapping their contractor workforce because of these changes and, as we told the House of Lords inquiry, our research shows at least a third of freelancers plan to stop contracting in the UK because of them. We continue to urge the government to rethink this disastrous policy before it is too late."
31/01/2020: FTSE 100 companies accused of "demonising" self-employed contractors
Some of the UK's biggest companies have been criticised for policies that ban the use of contractors operating under their own limited companies, in what's seen as a move to avoid scrutiny under new off-payroll tax rules arriving in April.
The new IR35 rules are due to be extended from the public sector to private companies, shifting the responsibility for determining a contractor's tax status onto the organisation that's doing the contracting.
As part of those new rules, companies will be required to ensure that they take "reasonable care when they make a determination about the employment status of a worker". This would effectively protect self-employed contractors from unfair decisions that force additional tax payments unnecessarily.
However, rather than engage with this process, some companies are treating contractors unfairly by either refusing to engage with those that operate under a limited company, or forcing contractors to work under PAYE, according to inniAccounts CEO James Poyser.
Poyser has now urged Chancellor Sajid Javid to abandon plans to expand IR35 to the private sector, as the actions of larger companies mean that self-employed workers are now being "demonised".
"Whilst I concur with your goal to ensure that 'two individuals working in the same way pay the same tax', I find the perpetuation of this simplistic rhetoric to be counterproductive," said Poyser, in a letter to the Chancellor on Tuesday.
"This... has resulted in large businesses pulling down the shutters on all who are self-employed. As was predicted in the 2019 consultation, companies are simply side-stepping the right to a fair determination with corporate policies that ban engaging the self-employed, and only allow employment via PAYE."
He added that recently published HMRC factsheets, which state that reforms "will not stop anyone working through a company if that suits them" and that "those who are complying with the existing rules should feel little impact", have become "mistruths".
He also suggested that the act of banning contractors from using limited companies was "in effect... removing their status as a business owner, and demoting them to temps".
Sky, Jaguar Land Rover, Ocado Technology, GE Aviation, Three, HSBC and Quilter have all been named directly in the letter as having policies that treat contractors unfairly.
When approached about the allegation, Jaguar Land Rover simply stated that it was following HMRC guidelines and that it is "compliant with the new IR35 legislation requirements".
A spokesperson for HSBC UK told us: "Like many large companies, HSBC is continuing to prepare for the changes to IR35 legislation in April 2020. As part of this ongoing review, we continue to work with our suppliers to ensure they and HSBC are compliant with the incoming rules."
08/01/2020: Government announces review of IR35 off-payroll changes
The UK government has launched a review of changes it made to off-payroll working rules following widespread concerns about how they will be implemented to the private sector.
The changes, known as IR35, were first introduced to the public sector in 2017 and are set to be expanded to the private sector in April 2020, although a number of organisations have criticised the government's handling of the rollout.
The IR35 rules are designed to address the issue of 'disguised employment', where self-employed contractors are able to set up limited companies to pay themselves through dividends, which are exempt from National Insurance. To avoid this, the responsibility for assessing tax status is shifted from the contractor to the organisation.
However, the government has been accused at times of being too aggressive in its enforcement action over unpaid contributions, and even of misunderstanding its own rules.
In November, a judge ruled that the government had incorrectly pursued a contractor for £240,000 in alleged unpaid taxes, arguing that HMRC had misunderstood the nature of his contract with the Department for Work and Pensions.
In April, MPs also attacked the government for failing to provide adequate support for public sector contractors, adding that an online tool created to determine employment status was woefully inaccurate. According to MPs, the HMRC check employment status for tax (CEST) tool had a success rate of just 50%, despite it forming a key part of HMRC decisions about an individual's status.
The government confirmed on Monday that the review would include an evaluation of the CEST tool, as well as an assessment of the experiences of public sector organisations when implementing reforms.
In a statement announcing the review, Financial Secretary to the Treasury, Jesse Norman, said: "We recognise that concerns have been raised about the forthcoming reforms to the off-payroll working rules. The purpose of this consultation is to make sure that the implementation of these changes in April is as smooth as possible."
The review will include a series of roundtable discussions with organisations and contractors most affected by the rule changes, which are set to conclude by mid-February.
The government also confirmed it will be conducting a separate review into how it can better support self-employed workers. This could lead to improvements in how workers are able to access finance and credit, and making the tax system easier to navigate, the statement added.
While the review has been welcomed by those opposed to the changes, there's little indication the government is considering a U-turn on the changes, or that it the April 2020 deadline will be moved.
"HMRC itself has said this review is to make sure reform is implemented smoothly, suggesting the government has every intention of rolling out needless changes irrespective of any findings," argued Seb Maley, CEO of contractor advisory firm Qdos. "That HMRC is still under the illusion that IR35 reform only affects those 'working like employees' also shows just how out of touch the government is with regards to the true impact of the changes." He added that contractors, agencies and private sector businesses should assume that the changes will be introduced as they stand and to prepare accordingly.
The government's handling of IR35 was raised during the most recent general election campaign, with both Labour and the Brexit Party both pledging to scrap the reforms if elected.
03/12/2019: Businesses urged to continue IR35 preparations despite Conservative review pledge
Private sector organisations have been urged to continue their preparation for the introduction of IR35 reforms next year despite a Conservative Party pre-election pledge to fully review the tax rules.
Speaking on the BBC Radio 4's Money Box, Chancellor Sajid Javid repeated a commitment, also made by Liz Truss last week, that his party would conduct a wider review into how it can better help the self-employed, adding that IR35 would be included.
"In our manifesto, we have promised a review of how we can further help the self-employed, for example, things like pensions and access to mortgages. But one thing, in particular, I want to look at again are the proposed changes to IR35," said Javid.
"We've made it very clear that we are on the side of self-employed people and we will be having a review, and I think it makes sense to include the proposed IR35 changes in that review."
The IR35 tax rules, which make organisations responsible for deciding the tax status of contractors, were introduced to the public sector in 2017 and are due to extend to the private sector in April 2020.
When questioned what the review could mean for businesses, Javid was unwilling to state whether the planned changes would be scrapped before that date.
However, despite the pledge, businesses have been warned to continue their preparations in anticipation of the April 2020 deadline.
"While a review of IR35 changes is certainly a sign of progress, reform is still set to be enforced in April 2020," said Seb Maley, CEO of IR35 specialist Qdos. "As a result, contractors, recruitment agencies and private sector firms must work off the basis that it will be introduced until told otherwise."
"A potential review into IR35 reform shows the Government is listening at long last. However, any review must be genuine and not lip service simply to win the votes of independent workers, who could be crucial in the outcome of the general election."
The Conservatives have been put under pressure to address the rule changes after a number of opposition parties announced they would conduct a review of the rules if elected. Labour's Bill Esterson said last week that the party would "absolutely" scrap the planned private sector roll-out, while Ed Davey for the Liberal Democrats said his party was committed to reviewing the policy.
"Given the Liberal Democrats have been praised by contractors for promising a review already, you are left to wonder if this is why the Chancellor has now decided to discuss the legislation," argued Maley. "IR35 was, as you might have noticed, absent from the Conservative Party manifesto."
The Brexit Party, meanwhile, suggested it was willing to abandon the rules entirely for both the private and public sector
29/11/2019: Opposition parties pledge to scrap private sector IR35 rules
Labour and the Brexity Party have both pledged to scrap controversial IR35 rules from the private sector, with the Liberal Democrats also promising a review of the tax reforms.
In what was seen as a surprise announcement during a General Election small business debate on Monday, former Labour Shadow Minister for Business, Energy and Industrial Strategy, Bill Esterson, said that the party would "absolutely" scrap the rules for private businesses, adding that it should "never have been implemented in one go".
"The way it's been implemented speaks volumes about the slapdash approach the Tories have taken towards the self-employed," said Esterson. "We absolutely can't see it rolled out to the private sector the way things are at the moment."
He also claimed that the rules had resulted in a noticeable reduction in the availability of skilled workers in the NHS and elsewhere.
The IR35 off-payroll reforms were first introduced to the public sector back in April 2017, designed to prevent the practice of 'disguised employment', where contractors would be taxed at the same rate as a company's employees. The changes, which would move the responsibility for determining tax status away from the contractor and into the hands of the company, are due to roll out to the private sector in April 2020.
Esterson's comments were echoed by Hector Birchwood, Brexit Party representative for Holborn & St Pancras, who also committed to scrapping the policy, claiming that the current rules simply force the self-employed to change the structure of their contracts "to evade the tax altogether".
"As a tax, it does not work, simply because people are too mobile and they can change the way they are," said Birchwood.
However, neither party was willing to share specific alternatives when pushed, although Labour's Esterson did point to measures such as the introduction of a Business Development Agency and the regional delivery of the National Investment Bank, as ways to create a "much fairer system" for taxing the self-employed.
The Conservative Party's Liz Truss, Ed Davey of the Liberal Democrats, and Amelia Womack of the Green Party were also present at the debate, held by the Association of Independent Professionals & the Self-Employed at a venue in Central London.
The Lib Dems stopped short of saying they would scrap the IR35 rules altogether, but Davey did agree that a wider rollout would "undermine the flexibility of self-employed people".
"IR35 is a very difficult and sensitive tool, and by putting it in the hands of the larger companies, be it public sector or private sector, it's had a whole set of unintended consequences," he said. "That must be reviewed. We need to think in all tax policy about the smaller people, the smaller businesses, self-employed."
The Conservatives meanwhile were unwilling to comment directly on the rules, with Liz Truss instead promising a "proper review" of self-employment rules, although the implication was this would fall under a much wider review of tax, the exact scope of which is unclear.
05/11/2019: IT contractor wins £240k appeal against HMRC
An IR35 tribunal has ruled that Her Majesty's Revenue and Customs (HMRC) was wrong to pursue an IT contractor for more than £200,000 in allegedly unpaid taxes.
Richard Alcock, who worked for the Department for Work and Pensions (DWP) between 2010 and 2015, was told by HMRC that he owed £243,324 in income tax and national insurance contributions.
After an initial IR35 decision in March 2017 backed HMRC's demands for the sum to be paid in full, a First Tier Tribunal ruling last week has supported Alcock's appeal, according to the FT Advisor. The tribunal cancelled HMRC's determinations and declared the IT contractor was not liable to pay any additional sums.
The IR35 reforms are designed to tackle tax avoidance by contractors who don't fall under HMRC's definition of being self-employed and pay their tax through an intermediatory company established to reduce tax liability. The rules currently apply to public sector organisations and will be extended to cover the private sector from April 2020.
Alcock, through his limited company RALC Consulting Ltd, engaged in contracts with the DWP and Accenture for the five-year period, where DWP was a client of Accenture. He had also worked on Accenture projects in the past.
HMRC argued these arrangements meant that Alcock was, in effect, working on an equivalent basis to full-time staff, and was therefore liable to pay the same rates of tax and national insurance, under IR35. The judge rejected HMRC's claims, however, saying the contractual arrangements didn't necessarily mean Alcock would have the expectation of being provided with work every day.
"His contract specifically states that he can only charge for work actually completed," said tax expert and a member of Alcock's defence team, Chris Leslie, according to the FT Advisor. "And to top it off, in one instance they did cut the project short at a moment's notice, and he was not paid.
"There is no question at all that he could charge just for making himself available, and neither was the client obliged to give him work or allocate work the work has already been agreed upfront.
"So, since there was no minimum obligation to provide work and no ability to charge for just making himself available, it is clear that the key elements of mutuality, in the work/wage bargain sense, are missing, and therefore he cannot be considered an employee."
HMRC's understanding of the IR35 legislation has previously been called into question, with MP Ruth Cadbury suggesting that figures show the taxman loses approximately 50% of the cases that it has brought against contractors.
An HMRC spokesperson told IT Pro: "HMRC is disappointed with the decision of the tribunal and intends to appeal."
01/11/2019: NHS Digital slapped with £4.3m IR35 tax bill
NHS Digital has been forced to pay a staggering tax bill of £4.3 million as a result of an HMRC ruling, despite having already made IR35 status determinations using the taxman's status checker tool.
This bill, which spanned the period between 1 April 2017 and 31 December 2018, is the first the organisation has paid after the contentious IR35 rule changes came into force for public sector organisations in April 2017.
The NHS made its own undisclosed determination using HMRC's check employment status for tax (CEST) tool, however, following HMRC calculations using the same tool, the organisation was forced to pay £4.3 million, a figure said to be much higher than anticipated.
"Following the implementation of the new rules for IR35 introduced for the public sector in April 2017, we undertook a considered assessment of the status for each individual contractor which we believed met the HMRC requirements," the report said.
"However, HMRC have challenged our assessment. We have been in extensive discussions but now consider it appropriate to acknowledge their position and create an accrual covering the period from 1 April 2017 to 31 December 2018. This accrual is £4.3 million including interest and penalties."
The discrepancy alluded to between NHS Digital's assessment using the CEST tool, and HMRC's assessment of the workforce could alarm organisations ahead of IR35 rule changes being extended to the private sector from April 2020.
HMRC claims it will generally stand by the result of the CEST tool when used by organisations like NHS Digital unless a compliance check finds the information provided to not be accurate.
The tool was devised by HMRC to enable organisations to navigate the complexities of IR35 arrangements and determine the status of their contractors in a much simpler way. However, the deployment of such a tool has previously been criticised after it came to light that HMRC's own assessments boasted just a 50% success rate'.
This figure was determined by Labour MP Ruth Cadbury based on the proportion of legal challenges HMRC brought against contractors and subsequently lost in court.
NHS Digital used this toolkit to assess all contractors employed up to December 2018, but then changed methodology. NHS Digital now makes an assessment internally, before the status of all contractors deemed outside the scope of IR35 is checked again by a third-party provider.
"Along with many public sector organisations, we have been working closely with HMRC on the most appropriate way to apply the IR35 regulations," an NHS Digital spokesperson told IT Pro.
"The Check Employment Status for Tax (CEST) tool forms one part of our overall approach to applying the regulations. Discussions are ongoing with HMRC on potential liabilities and we are unable to say whether the application of the CEST tool has led us to possibly higher liabilities.
"We are now additionally using a third-party assessment for completeness. This is provided through our contractor supply agency to give additional assurance that we are operating the regulations correctly. Until we fully understand the legal reasoning of an assessment produced by HMRC, we will not make a decision on whether to appeal."
An HMRC spokesperson told IT Pro that they were unable to comment on identifiable taxpayers, but added "we just want to help organisations get the rules right".
"HMRC has put an extensive range of support in place to help businesses and other organisations get the status of the contractors they engage right. We have dedicated teams providing education and support to all businesses, public bodies and charities affected."
"The off-payroll working rules make sure that the same tax and National Insurance contributions is paid for individuals working like an employee, but through their own limited company, as individuals who are employed directly."
22/10/2019: IT contractor numbers in sharpest decline since 2008
The number of IT contractors has seen the sharpest decline since the financial crash, according to research.
There has been a 2.4% decline in IT contractors, from 125,012 to 121,989 in 2018, ending an almost yearly increase since 2008 - which excludes a minor dip in 2014.
It's the sharpest decline since the global financial crisis saw a boom in contractor numbers, according to data obtained from Access Financial, a global payroll and contractor accountancy firm.
The company said the decline in IT contractors last year is likely due to the impact of the off-payroll working reforms in the public sector, which resulted in many contractors being moved into permanent roles or umbrella companies.
"While this is a modest fall it must be seen in the context of a steady year-on-year increase in the number of IT contractors since the financial crisis," said Kevin Austin, chief executive at Access Financial. "The number of IT contractors jumped by 64% between 2009 and 2017, which was driven by demand from both IT professionals and organisations utilising IT skills.
"Many public sector IT contractors sought work elsewhere when the off-payroll working rules came into force. From April next year, their options will be limited. There have already been reports of large scale users of contractors, such as banks, saying they will not engage off-payroll workers from next April but that may turn out to be a knee-jerk reaction similar to what was seen in the public sector when the rules were first introduced."
Access Financial also said that the impact of the changes to off-payroll working rules on contractor numbers is likely much greater than these numbers show. This is because the number of IT contractors increased at an average annual rate of 8% between 2009 and 2017, so the 2.4% decline in 2018 should be seen in the context of what might otherwise have been a further increase of around 8%.
"We could well see a more dramatic fall in the number of IT contractors next year," Austin added. "In those cases where the IR35 status of contractors is borderline, private sector organisations likely will err on the side of caution and refuse to engage those contractors off-payroll. Despite some of the claims being made, however, it seems unlikely that the rules will be the death knell of contracting."
"Much will depend on whether HMRC takes tough enforcement action and publicly hauls an organisation over the coals. If that happens, it likely will have a chilling effect on the use of contractors. If enforcement action is not forthcoming, the impact of the reforms could be more limited."
27/08/2019: HMRC accuses 1,500 GSK contractors of 'disguised employment'
HMRC has delivered letters to almost 1,500 contractors working for pharmaceutical giant GSK, accusing them of being non-compliant with new IR35 tax laws.
HMRC alleges the contractors would have been employees of GSK were they not operating through a 'Personal Service Company' (PSC), and have therefore miscategorised their employment status to avoid higher rates of tax.
"We're writing to you because you told us that you were self-employed when you worked for, and received payments through, your own company," each letter stated, a copy of which has been supplied to us.
"After looking at the information we have for the 2018 to 2019 tax year, our view is that the contract between your PSC and GlaxoSmithKline (GSK) comes under the off-payroll working rules 'IR35'."
"Whether a worker is employed or self-employed for tax purposes is not a matter of choice," the letter added. "Instead, you need to look at the facts of the working relationship between you and GSK."
GSK said it's aware that a number of employees have received the letters, and has urged those affected to contact their financial advisers, according to a spokesperson speaking to the Financial Times.
It's the latest attempt to curb the use of PSCs and bring private-sector tax laws in line with those already in place in the public sector.
However, Seb Maley, CEO of Qdos, an IR35 advisory firm, believes the move is "yet another example of the taxman's aggressive and unfair treatment of independent workers".
"HMRC takes the view that contractors are guilty until proven innocent," he added. "At this stage, none of these contractors' actual working practices have been reviewed. Without doing so, it's impossible for HMRC to say with confidence that contractors are in the wrong."
HMRC has also been criticised for failing to adequately enforce IR35 laws, with Labour MP Ruth Cadbury claiming in April that the government misunderstands its own legislation.
HMRC has said those contacted have until 19 September to appeal the notice if they feel their work falls outside IR35.
09/08/2019: Government 'does not appreciate' freelancers'
The vast majority of freelancers do not have faith in the government's planned IR35 reforms, which are set to be implemented within the next year.
From April 2020, the government will enforce a change to how private sector contractors pay tax on earnings. The changes will bring their arrangements in line with full-time employees and public sector freelancers, and workers can no longer channel their income through a limited company to avoid tax.
Ahead of April 2020, however, 85% of contractors do not believe that Her Majesty's Revenue and Customs (HMRC) understand the negative implications of these reforms, according to research by QAccounting.
The survey of more than 1,200 contractors, carried out with resource website Contractor Weekly, found that just 9% feel the Treasury understands how the rules will be implemented.
Moreover, 91% of those asked said they do not believe the government appreciates contractors as a tool for economic growth, as against just 1% who did.
"Given HMRC's heavy-handed approach to IR35 compliance in recent years, you can understand why contractors have next to no confidence that the tax office grasps the possible negative implications of incoming changes to the rules," said QAccounting CEO Mike Butchart.
"With a new Prime Minister now in place, the fact that the majority of independent workers have questioned HMRC's competence should be for food for thought for Boris Johnson - as should the news that contractors do not think the Government appreciates this vital sector of the workforce as a tool for economic growth."
Although the implications of the IR35 reforms are potentially damaging, they can very easily be managed, according to Qdos Contractor's CEO Seb Maley, whose insurance firm carries out work with private sector firms.
"IR35 reform poses a number of challenges to private sector firms, that must prepare in order to be in a position to make well-informed and ultimately accurate decisions regarding a contractor's tax status," Maley told IT Pro.
"Contractors are understandably concerned, but IR35 reform - albeit needless and potentially damaging - can, in fact, be managed."
28/05/2019: Most IT firms are preparing to slash contractors
More than half of UK IT companies are considering the extreme step of indiscriminately cutting down on the number of contractors they use ahead of planned changes to tax law.
When the government introduces a change to IR35 legislation in April 2020, private sector contractors will be subject to the same rules that contractors have been working under in the public sector since nearly two decades ago.
But research by Brookson Legal has shown that IT companies are preparing to axe the number of contractors they use due to a number of concerns, as well as general confusion, around how the IR35 changes will come into effect.
The overwhelming majority of tech firms, 85%, have that IR35 will affect the number of contractors they hire, versus 73% of all businesses. Meanwhile, 61% of IT companies surveyed confirmed the changes will encourage them to reduce the number of contractors hired, versus 48% of all companies.
Worryingly, 62% of the 500 mid-sized and large businesses questioned said the changes will force them into instigating a blanket approach with their IR35 assessments because they won't have time to assess contractors properly.
"Whilst it is heartening that many businesses wouldn't consider taking a blanket approach to this legislation, the fact that 62% of IT businesses are actually considering doing this is shocking considering the well-publicised impact of this approach in the public sector," said managing director of Brookson Legal Joe Tully.
"IT firms may see this blanket IR35 approach as a quick fix but it is anything but and should be avoided at all costs.
"Far from saving businesses time and money, this approach will lead to serious repercussions - leaving the IT sector wide open to increased cost, a wide-scale contractor talent drain, reputational damage, and in some cases accusations that they have broken the law."
Among the major concerns businesses share are that IR35 changes will take time to understand, as well as raise costs. Firms are also concerned that projects will be delayed due to contractors leaving, and that they will lose skilled freelancers.
The majority of companies, 56%, have cited the main benefit of hiring external contractors being the specialist skills they offer versus in-house staff.
"The new IR35 off-payroll rules come into force in April 2020 but the time for UK businesses to put their IR35 house in order is now," Tully continued.
"By undertaking proper audits, and seeking expert advice, businesses will be able to illustrate that they are taking 'reasonable care' with their IR35 assessments and will almost certainly find that the impact of IR35 is not as far-reaching as their own gut feeling leads them to believe."
08/04/2019: HMRC does not understand' new tax rules
MPs have accused the government of failing to listen to growing concerns around how IR35 tax rules have affected contractors working within the public sector.
HMRC has come under particular scrutiny for the effectiveness of a tool used to determine employment status, which forms a key part of decisions as to how contractors pay tax. In particular, MPs said, just a 50% success rate for IR35 tax cases HMRC has brought against contractors points to a troubling dynamic.
"The HMRC check employment status for tax (CEST) tool that is used to assess workers assumes mutuality of obligation, which is one of the main tests that has to be assessed in all engagements via IR35 determination," said Labour MP Ruth Cadbury during a parliamentary debate last week. "As a result of the assumption, the CEST tool is flawed.
"It appears that HMRC does not understand the IR35 rules.
"If HMRC has lost approximately 50% of IR35 tax cases that it has brought against contractors, how can it implement an online tool to get a correct IR35 result? HMRC gets that right only 50% of the time when it goes to court, which has to be worrying."
Another MP, Paul Sweeney, echoed these concerns and asked the government whether there would be formal independent scrutiny to assess the accuracy and overall value of this tool, in light of HMRC's low success rate.
The government's economic secretary to the Treasury John Glen MP said HMRC will continue to review and improve CEST in the coming months. This is ahead of IR35 rules transitioning from covering just public sector organisations to private sector companies too.
To coincide with the ongoing consultation, enhancements to the tool, as well as wider guidance, will be issued ahead of the reforms being rolled out in 2020.
05/03/2019: Government opens second consultation on off-payroll working rules
The government has launched another consultation for its plans to extend off-payroll working rules from the public sector to private sector firms from April 2020.
Stakeholders will be asked for their views on the scope of the IR35 reforms, and how to best provide support and education for what the changes mean for businesses and contractors.
Under the rules, contractors who are employed by a public sector organisation are expected to pay roughly the same tax and national insurance contributions as full-time employees, on the basis of self-declaration.
But many contractors set up limited companies, and take advantage of certain loopholes to pay themselves 'dividends' as company directors. Therefore they can bypass the need to make national insurance contributions.
Changes in 2017 meant IR35 enforcement fell under the remit of public bodies that use contractors, with a further rule change touted by the government aiming to extend the remit of enforcement to private sector organisations.
The government says the changes are an attempt to address tax or national insurance contributions avoided through non-compliance with off-payroll working rules, which will amount to 1.3 billion a year by 2023/24.
"This consultation is intended to provide organisations and off-payroll workers with greater certainty around how the off-payroll working rules will operate from 6 April 2020 and the obligations and responsibilities of the various parties involved in the labour supply chain," the consultation document said.
This HMRC-led consultation is the second government survey commissioned within a year on the IR35 changes, after a previous consultation was conducted over summer 2018, with the results released in October.
Individuals and organisations will have from today until 28 May to respond with their thoughts on the changes. This is in addition to a series of workshops with invited stakeholders to be held during this period.
The results of the consultation will inform the draft Finance Bill legislation, expected to be published in Summer 2019, with the rule changes being enforced by April 2020.
13/02/2019: Contractors have 'zero confidence' in public sector IR35 assessments
IT Contractors have little to no confidence in the private sector's ability to handle the IR35 tax reforms due to arrive in April 2020, according to new research.
The IR35 rules, which were first introduced to the public sector in 2017, will be extended to the private sector from next year and aim to clamp down on the number of contractors avoiding tax contributions.
Under current rules, contractors are required to self-declare whether their work falls within the IR35 framework, and therefore should be taxed in the same way as full-time employees. However, it's also possible for contractors to 'disguise' their employment by setting up limited companies and receiving payments as dividends rather than a salary, avoiding the national insurance requirements.
The reforms next year will mean that private sector organisations will be responsible for managing IR35 status, and therefore will be required to assess whether each contractor should be subject to the same tax as full-time employees.
Research by contractor advisory firm Qdos has now revealed that 77% of contractors feel the private sector will be unable to handle this responsibility effectively, 30% of which believe systems will not be ready in time for the 2020 deadline.
What's more, 61% also believe that direct clients will be far better suited as determining IR35 status compared to recruitment agencies.
"Thousands of contractors have been wrongly placed inside IR35 by public sector engagers as a direct result of reform in 2017," explained Qdos CEO Seb Maley. "Understandably, this has led many independent workers to question whether the private sector will be in a position to administer IR35 accurately next year."
Concerns are likely justified, as the IR35 reform to the public sector in 2017 brought with it a slew of incorrect IR35 assessments and blanket policy changes that aimed reduced the administrative strain on companies.
"Private sector clients and recruitment agencies would be wise to pay attention to what are justified concerns of contractors," he added. "Businesses rely on the flexible of the independent workforce, while the recruitment industry, that now finds itself caught up in IR35 reform, depends on contractor placements for most of its turnover."
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