IR35 creates uncertainty around contractors’ tax status, according to a survey of AccountingWEB members, with 58% of respondents indicating that clients found determining employment status to be the most troublesome aspect of the regime. But abolition of IR35 was supported by only a slim majority, and more than half of the respondents indicated that HMRC “rarely troubles me with IR35”.
Asked which option would be the single most effective solution for resolving IR35 issues, 204 respondents (52%) recommended abolition in order to “free entrepreneurs to work the way they want to”.
Just 15% said income tax and NICs should be merged, while 16% said the onus to prove employment status should shift from the contractors to the engager or “client”.
Twelve per cent favoured legislation to clarify employment status. As AccountingWEB reported yesterday, the Office of Tax Simplification has invited responses to a series of questions to inform its current review of employment status issues. A “statutory employment test” is one of the possibilities that interested parties are invited to consider.
The IR35 legislation is intended to ensure that people providing services through intermediaries pay the same income tax and NICs as someone employed directly, where the arrangements amount to “disguised employment”.
Uncertainty
Eighty-five per cent of respondents agreed (67% strongly) that “IR35 creates uncertainty around contractors’ tax status”, and 78% reported that proving employment status created extra costs for clients.
Fifty-eight per cent said determining employment status was the aspect of IR35 that caused the most trouble for their clients.
Twenty-four per cent agreed with the statement that “IR35 has helped prevent false self-employment abuses”, while more than half (56%) disagreed, 33% strongly.
Just 13% suggested that IR35 did not concern them, while 58% indicated that it was a major concern.
Asked to indicate their preferred solution for IR35 clients, almost half (48%) said they offered “bespoke advice and arrangements based on [clients’] engagement and contractual circumstances”. Only 5% preferred to offer, or introduce, an “umbrella company” solution.
Dealing with HMRC
More than half (57%) indicated that “[HMRC] rarely troubles me with IR35”.
Only 16% agreed that “if something new crops up, HMRC’s IR35 guidance is usually sufficient”, while 54% disagreed.
Fifty per cent said “few HMRC officials have the technical competence to deal with IR35 issues”, while 19% disagreed.
For almost a third (32%), IR35 did not pose any non-standard problem in the past year that required extra work or external support. Only 5% said non-standard IR35 problems were “a constant challenge”, and 42% said such problems arose once a quarter or less often. Almost three-quarters (71%) had not had to deal with an IR35-related tax appeal or enquiry.
Awareness
Earlier this year the House of Lords Personal Services Companies committee concluded after a four-month inquiry that many individuals “simply take a risk” that HMRC will not examine their employment status – an attitude that was “fostered” by a decreasing number of compliance investigations. Compliance required “a sound understanding of case law”.
The committee reported: “The decrease in the number of annual investigations from over 1,000 a year in the tax years 2002 to 2004 to only 256 in the tax year 2012/13 was noteworthy, and the vast proportion of [the committee’s] respondents and witnesses called for a greater emphasis in aiding understanding, either of IR35 generally, or of new resources to support understanding and assessment.
“In light of HMRC’s own estimate of the personal service company population being in the region of 200,000, it is understandable that they might be unable to investigate all the cases in which there may be a medium or high risk that IR35 might apply, particularly as it must be considered on an individual contract basis.”
However, Seb Maley, operations director at IR35 specialists Qdos Consulting, said it was reassuring that the AccountingWEB survey results “clearly show that accountants are very aware of the risk that IR35 poses”.
It was also clear, he said, that the legislation is “hugely unpopular among industry professionals” and that “the lack of clarity or meaningful guidance continues to cause problems”.
It was “unsurprising” that one of the biggest issues is determining an individual’s IR35 status, given “the number of grey areas and subjectivity”.
Maley added: “Hopefully this will prove that HMRC need to significantly improve the information available to both accountants and those affected by IR35, particularly once the much-maligned business entity tests have ceased to exist.”
Income tax and NICs
Chris Jones, director of tax markets at Tolley, told AccountingWEB: “The fundamental problem on this issue is not the employment status of an individual per se, but the fact that the national insurance liability differs so greatly between those deemed employed versus those in business on their own account. Unless or until this can be dealt with, the unsatisfactory and uncertain position in which small businesses find themselves will continue as will the difficulty of filing self-assessment returns on behalf of these businesses.”
The Lords committee's report last March said the government should consider combining income tax and national insurance contributions: “The current structure and rates of income tax and national insurance provide an incentive for taxpayers to arrange their financial affairs in order to minimise the amount of tax and national insurance paid. This has led to complex legislation, such as IR35, to counter such arrangements. Whilst we recognise the complexities in merging income tax and national insurance and the effect that this may have on the contributory principle, we recommend that the government re-examine the longer term case for combining taxes on income and national insurance.”
The government said in its formal response that “since employers are already adjusting to a significant number of reforms to payroll systems, the government will wait for further progress on planned operational changes to the tax system before re-examining the operational integration of income tax and national insurance”.
Penalising contractors
Many responses to the question “is there anything else you would like to tell us about your stance on IR35?” suggested a sense of unfairness and an unnecessary burden. “It’s punishing the contractor instead of the engager,” one respondent said.
Other responses included:
- “My clients find it restricts their ability to trade freely and normally.”
- “It is an expensive to comply with, uncertain, subjective and should never have been passed.”
- “The risk should be with the employer and clarity provided to individuals.”
- “It has been a colossal waste of time and money for everyone who is involved in it.”
- “This is yet another ball and chain to slow down economic recovery and entrepreneurial spirit.”
- “It is an unnecessary business hurdle.”
- “Does not do what it was intended to so abolish it.”
- “I would like an new separate employment status for contract workers.”
- “I do not take on IR35 clients as I feel it will all eventually backfire.”
Other responses indicated support for IR35 or suggested reform to make it unnecessary:
- “Tax avoidance has to be tackled.”
- “I agree that protection is required to stop employees shifting over to incorporation …”
- “Introduce a dividend tax for close companies.”
- “Forget about employment status, contract reviews etc. and make close company dividends subject to NICs like salaries.”
Rationale
AccountingWEB editor John Stokdyk said he was “intrigued” to see how the survey results shifted during October. “The early respondents were more willing to accept the anti-avoidance rationale for IR35, but the tide turned as the number of voters rose,” he said.
“While 56% of AccountingWEB members appear to disagree with the reasons for introducing IR35, the likelihood is that we’ll be wrestling with the regime for the foreseeable future. With the goalposts still moving on this, the webinar on 28 November will be a very timely opportunity to get further technical and practical insights from Chris Jones and Seb Maley.”
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