The government finally introduced IR35 reform in the private sector six months ago. At the time, a Simply Business survey revealed that nearly a third of contractors expected reform to cost them more than £20,000.
Medium-sized businesses don’t have a formal IR35 process in place
According to a survey from tax advisory firm BDO, more than half of medium-sized businesses don’t have a formal process in place for assessing a contractor’s employment status (small businesses are exempted from the change).
55 per cent of these firms said that they’ll worry about IR35 once their business gets back to normal after Covid-19.
But despite HMRC’s ‘light touch’ on compliance for the first 12 months of private sector reform, BDO warns that businesses should adapt quickly: “Businesses who do not comply will still need to pay tax and could face significant penalties. HMRC has shown that it will not turn a blind eye to non-compliance”.
Contractors will pay more in tax next year
The government is hiking National Insurance by 1.25 per cent for employees, employers, and the self-employed from April 2022.
The government has also announced that it’ll be hiking the dividend tax rate by 1.25 percentage points from April 2022, too.
These increases stack up more challenges for a sector already struggling with IR35 reform.
Matt Fryer tells Contractor UK that umbrella company contractors will be hit twice as hard by the National Insurance hike, “where the contract rate includes the employer costs which is predominantly employer’s NIC.”
HMRC is checking ‘payroll compliance’
HMRC has promised that it won’t launch enquiries into personal service companies (PSCs) unless it suspects that they’re deliberately breaking the rules.
But Nigel Nordone explains for Contractor UK that two contractors he supports are currently undergoing PAYE compliance checks. This involves HMRC checking payroll to clarify how contractors are paying themselves.
Nordone explains that this could give HMRC a back-door to investigating IR35 compliance, without breaking its promise to refrain from launching enquiries unless foul play is suspected.
Even government departments can’t get IR35 right
According to FT Adviser, three government departments have been given huge bills by HMRC for not applying IR35 rules correctly. While private sector IR35 reform was only introduced in April 2021, the public sector has been grappling with the changes since 2017.
- HM Courts & Tribunal Service paid £12.5 million to HMRC in 2020-21 relating to incorrect status determinations between 6 April 2017 and 5 April 2020
- the Department for Work and Pensions paid £87.9 million to HMRC in 2020-21 for historic errors from 2017-2020, although a liability for 2020-21 was agreed too
- the Home Office paid HMRC £29.5 million for incorrect assessments, as well as £4 million for ‘careless’ application of IR35 rules
Seb Maley questions who might be next, adding: “given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made.”
He urges businesses to make sure IR35 compliance is high in their priorities.
Roles can morph from inside to outside IR35 – so be careful
Contractor UK quotes an IT contractor as saying that one client they were hoping to work with changed the opportunity from inside to outside IR35 almost overnight.
They explained: “Possibly [due to not many candidates going forward], they might have changed the working practices, and then reassessed the contract. But I wouldn’t hold my breath on the [change to working practices] actually.”
If you notice any opportunities changing like this, Graham Webber, a director at WTT Consulting, urges caution: “a simple re-label to ‘outside’ is going to be a hard hurdle to overcome should HMRC [subsequently] ask any questions”.
CEST users are being shown an ‘undetermined’ status
Finally, the Express has reported on HMRC’s CEST data released in June 2021. CEST – or Check Employment Status for Tax – is HMRC’s tool that aims to provide a view on a particular worker’s employment status.
Both contractors and the clients they work for can use the tool to help them work out IR35 status.
But HMRC’s June data shows that 210,100 contractors from November 2019 to May 2021 were shown an ‘undetermined’ status, which suggests that many contractors are still not getting clarity over their status.
The Express further reports on a discrepancy in the data, quoting Matt Fryer: “According to CEST data, 49-56 per cent of all contractor roles clearly fall outside of IR35, with another 19-21 per cent in a grey area that the tool is unable to determine.
“Market data from Jobfeed, however, indicates that only 26 per cent of contractor roles are currently being advertised as outside IR35 (w/c June 7).”
Fryer questions where all of these outside IR35 roles are, suggesting that businesses might not have faith in the processes they’ve put in place to determine IR35 status – linking back to the first point in this article.
By Sam Bromley
Source: Simply Business