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It is not yet certain if this will be a watered down version of the original or one with more teeth. But judging by the Government's rhetoric, the latter sounds more likely.
Five years ago, the freelancer lobby groups had hopes that a Conservative Government might abolish the controversial contractor tax. Now, the opposite seems likely as the consultation paper after the Summer Budget talks about IR35 not being effective enough; non-compliance estimated to cost over £400 million a year; and finding a solution that protects the Exchequer and improves fairness in the system. See: IR35 Mark 2 heads closer as Government consults - Shout99, July 2015.
David Greene of specialist contractor service providers, Nasa Consulting argues that the Government’s failure to legislate on self-employment status is heading to industry damage under HMRC’s new IR35 review.
He writes:
The Government’s failure to legislate on self-employment status is heading to industry damage under HMRC’s new IR35 review.
HMRC have stated they are now reviewing the application of IR35 as it’s not ‘working’ for them. In their just released consultation document, they are using a throw away emotional line to say that freelancers avoiding taxes or national insurances are putting HMRC’s tax income at risk.
Independently of this, the UK tax courts have found (see MBF Design v HMRC 2011) that freelancers are genuinely self-employed and are not avoiding employment taxes, thus we can take this HMRC line as subterfuge for something else, i.e. to cobble together unfair rules to increase their tax take.
Dividend
In light of the new 7.5 per cent tax on dividends, it is now the case that incorporated freelance workers provide a total tax and NI take in line with non-incorporated self-employed workers.
Although this 7.5 per cent dividend rate is below the NI rate of the self-employed, it starts at a lower level and is uncapped at the higher levels resulting in a probable excess of deductions for those that have set up their own company to protect their self-employment risk.
Sledgehammer
HMRC have said they believe many of the self-employed are actually employed. This is a one sided judgement, which they have continually used in IR35 assessments, and found to be incorrect time and time again by industry and by the courts.
HMRC are now heading towards a new sledgehammer approach of using only one element (control, substitution or direction) of employment status tests to capture freelancer workers into paying employment status taxes without giving them employment rights or benefits.
In this author's experience of handling IR35 status cases against HMRC, HMRC will find workers liable to extra taxes and national insurance on unreasonable grounds and without an independence of opinion.
Swathes of workers and end clients will be burdened with significant tax and NI increases, in exactly the areas that the UK Courts have found them not to be liable to the extra taxes.
Erroneous
Whilst there is little doubt that the self-employed should not be classified as employed, and vice versa, it is extremely dangerous for HMRC to be allowed to make a tax judgement that is erroneous, as well as inherently unfair on those that suffer from the process.
With a plethora of self-employment status cases having passed through the courts in the last 15 years since IR35 was introduced, it is time that Parliament takes a lead on this.
Parliament should set out the tests of self-employment, which are much defined in cases like MBF Design v HMRC. As with non-incorporated self-employed workers, the end users and the workers will then know where they stand with tax and national insurance liabilities and prevent misuse of status by all parties.
For interested parties who want to see HMRC’s ‘discussion’ document on IR35 and to submit opinions to HMRC, the link is here.
The author of this article, David Greene is a director of a payroll and an accountancy services company, and therefore provides this article without bias towards workers retaining self-employment status.
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IR35
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Susie Hughes © Shout99 2015
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