Tax Preparation Specialist Questions Whether IR35 Off-Payroll Working Arrangements Ready for 2020 Roll-out to Private Sector
Despite a number of controversies since IR35 reforms were first introduced for contractors and freelancers working within the public sector, HMRC is pushing ahead with plans to roll-out the reforms to cover contractors working within the private sector in 2020. In light of criticisms of the roll-out during a debate on IR35 reform in parliament last week, tax preparation specialist David Redfern, Managing Director of DSR Tax Refunds Ltd, questioned whether the reforms are currently fit for roll-out to the private sector due to the issues experienced by public sector contractors.
IR35, otherwise known as Off-Payroll Working Regulation, was introduced in 2000 in order to crack down on tax avoidance through disguised employment. Reforms were introduced in 2017, initially aimed at contractors working on public sector contracts. These shifted the responsibility for checking employment status from the contractor to the business utilising the contractor. Plans to roll these reforms out further to cover the private sector are due to go ahead in 2020, with the government claiming that this will close a tax avoidance loophole which they estimate will cost public finances £1.3 billion by 2024. However, a debate in parliament on IR35 reform on 4th April heard MPs discuss “anxieties about the roll-out in the private sector”, with particular concern raised because “HMRC guidance and tools are far from 100% effective”. Redfern, who has long questioned the effectiveness of IR35 legislation commented “Of course, the government via HMRC is correct to tackle tax avoidance and non-compliance and any loopholes which allow individuals to obtain the benefit of tax advantages through disguised employment should be closed. But there are legitimate concerns about the impact on small business, especially at a time when the economy is fragile at best, and this rollout threatens further calamitous impact on the freelance and contracting sector”.
The debate in parliament heard MPs air a number of concerns which had been raised by their constituents, including the impact on businesses to recruit contractors – with shrinking pools of talent, reduced flexibility and increased costs all being cited as potential results of the rollout. Redfern stated “Through the public sector rollout of the reforms, large numbers of contractors including many IT contractors on government IT projects have chosen to no longer work on public sector contracts due to the concerns surrounding HMRC’s pursuit of those they believe fall foul of the reforms. Whilst public consciousness often focuses on higher-paid contractors, flying under the radar are the large number of lower-paid contractors, including many working within the NHS as nurses or nursing assistants, who now find themselves caught up in the net of IR35”.
Issues surrounding HMRC’s Check Employment Status for Tax (CEST) tool came in for particular criticism in parliament, with the tool being described as “flawed”. Redfern stated “CEST is still being flagged as a huge issue with regard to rolling out IR35, in particular with its assumption of ‘mutuality of obligation’ or MOO. Many contractors, especially those in lower-paid contracting roles, will know that not only can they cancel their shift at any time, so can the employer – particularly within the NHS – with no expectation that there will be available work at any point in the future and yet CEST has that mutuality of obligation built into its assumptions. As the reform shifts the onus of determining whether an individual comes within IR35 from the individual to the business, many contractors will find themselves caught up in IR35 due to an inaccurate assessment using CEST. And yet criticisms of this tool go back at least a year, if not longer”. Redfern added that due to these concerns, private sector businesses may choose instead to move their business to large outsourcing organisations which would remove flexibility within the workforce while at the same time increasing costs.
Redfern stated “The government is rightly concerned with closing loopholes which lead to tax avoidance, as we have seen with the disguised remuneration schemes. However, contractors have legitimate concerns that their efforts to remain on the right side of regulations could ultimately land them with huge tax bills in the future. In addition, as HMRC is currently losing around 50% of the cases they bring against contractors, this suggests that the IR35 reforms need further attention before rolling out. It would be far better to delay the roll-out beyond 2020 than rush it through and cause further confusion”.
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