‘Contractors must challenge IR35 via self-assessment’ • The Register

The UK government has suggested IT contractors challenge errors in their tax status and reclaim overpaid taxes through a self-assessment, but some experts believe the plans are impractical and flawed.

Tax authority Her Majesty’s Revenue and Customs (HMRC) was responding to a report by the Public Accounts Committee (PAC) criticizing high levels of non-compliance with the UK’s non-payroll tax regime, IR35.

Difficulties in complying with IR35 rules, which apply to many IT contractors, across central government reflect poor implementation by HMRC and other government agencies, PAC said.

New IR35 rules were introduced for businesses in April 2022 after a year-long delay caused by the COVID-19 pandemic. The rules were introduced in the public sector in 2017.

The report also expresses concern that it is too difficult for workers to challenge incorrect status determinations.

“The lack of a clear definition of self-employment and limited access to relevant personal information for each contractor can make it difficult for hiring organizations to confidently determine status,” the report said. Contractors can challenge decisions with the hiring organization, but they have no independent avenue of redress.

In response, HMRC said contractors who still disputed the tax determination after a direct appeal to the employer could reflect their own tax assessment in their self-assessment statement.

“HMRC has 12 months from the date of receipt of the statement to open an investigation, during which time they may consider whether the employment status is correct,” the department said.

“Where HMRC disagrees with a customer’s self-assessment, all customers have the right to have the decision reviewed and to appeal to an independent tribunal.”

Dave Chaplin, CEO of tax compliance firm IR35 Shield, rejected the move.

“To suggest that a worker can seek to recover money from an incorrect assessment through the self-assessment tax system is wrong, because the worker cannot recover most of the money deducted, which is to employers. [National Insurance],” he said.

“Furthermore, to suggest that the worker can appeal to a tax tribunal is absurd, as the cost of doing so will far outweigh the tax and could take up to 10 years to resolve, as we have seen. The government’s comments claiming there are ‘roads appeal’ is unworkable nonsense and highlights the obstacle to natural justice inherent in the IR35 reforms.”

In February, HMRC Compliance Director Nicole Newbury acknowledged that businesses implementing blanket bans on contracting Personal Services Companies (PSCs) may not have complied with IR35, but the challenge decisions could be a long process.

Chaplin was also unimpressed with HMRC’s efforts to fix problems with the contractor tax system.

What is IR35?

The IR35 is a reform unveiled in 1999 by the British tax authorities. The latest regulatory change – which came into force in April 2021 – requires medium and large businesses in the UK to define the tax status of their contractors and freelancers. Previously, this was set by the contractors themselves.

Entrepreneurs who are within the scope of the legislation – that is, inside the IR35 – will have to pay more tax than they think.

The reforms are part of the government’s crackdown on so-called disguised employment, where workers behave like employees but can lower their tax bills by charging for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measures first came into effect in the UK public sector in 2017. The UK government hoped the reforms would claw back £440m by bringing together 20,000 contractors.

HMRC estimates that only one in 10 private sector contractors who should be paying tax under current rules are doing so correctly. He estimates the reforms will recoup £1.2bn a year by 2023.

In the United States, there are two main types of contractors: those who fall under Form 1099 (Form 1099-Misc) and those who fall under Form W-2, the latter being similar to the IR35 in the United Kingdom. However, there are major differences. According to contractors and freelancers information site Contractor.com, the main difference is that “in the UK, the contractor is financially punished if they are found to be a disguised employee, while ‘in the United States, it is the customer who is penalized.

The National Audit Office, an independent public spending watchdog, had previously pointed out that HMRC does not offset tax payable by the employer against any tax already paid by the contractor or the PSC. The effect was that individuals could be taxed twice based on the IR35 status judgment. The PAC recommended that HMRC should not end up taxing the same income twice or unwittingly contributing to workers who do not pay their fair share of tax.

In response, HMRC said it had already put in place a process to reduce the circumstances in which it charged twice the fee for the same undertaking in the event of non-compliance. “Where HMRC has sufficient information to identify them, they will advise the worker and their intermediary whether they are entitled to claim a refund of tax overpaid in relation to the specific non-pay work engagement.”

But Chaplin said: “HMRC say they have a process to reduce tax collection twice but will only do so if they have enough information to identify the worker. In my view this is not is not strong enough; there should be a legal obligation for HMRC to locate and process the refund. If HMRC fails to do this, the ‘royalty payers’ bill should be reduced by a deemed amount of tax paid.

Seb Maley, CEO of insurance company IR35 Qdos, said: “The PAC has delivered a damning assessment of IR35 reform, with the report calling on HMRC to make changes to these misguided rules. And although the HMRC has accepted the recommendations made, the tax office is simply promising to look into and investigate these matters further.

“Ultimately, this response lacks a concrete promise to address many of the fundamental issues resulting directly from the introduction of the IR35 reform – whether to ensure that contractors have a fair chance to overrule decisions unfair IR35s or to give businesses every opportunity to comply with the rules.

“It’s a disappointing – albeit predictable – response that we’ve seen too often from the government whenever pressed on IR35.”

The PAC reported that government departments had difficulty interpreting tax rules. “Central Government is spending hundreds of millions of pounds to cover tax due for people wrongly assessed as self-employed. Government departments and agencies were due or expected to owe HMRC £263m in 2020-21 due of poor administration of the rules,” the report said.

The NAO found that the departments’ 2020-21 financial statements showed the Department for Work and Pensions (£87.9m), the Department of Justice (£72.0m), the Department for Interior (£29.5m), the Department for the Environment, Food and Rural Affairs. Affairs (£19m) and NHS England (£4.2m) all erred in the IR35 assessments.

HMRC said it has undertaken “an extensive program of customer education and support as the reforms are implemented, and is already providing additional support to address the inherent challenges customers face when they are identified”. ®

Comments are closed.