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Tip of iceberg
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IR35 reform is the tip of the iceberg for HMRC

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Seb Maley considers what we might expect to follow from IR35 and where new, controversial legislation might end, if at all.

27th May 2021
CEO of Qdos
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The IR35 reform’s introduction marks the most significant moment in this tax legislation’s controversial history. Contractors lost the right to determine their IR35 status when engaged by medium and large businesses, mirroring reform rolled out in the public sector in 2017.

But does it end there for HMRC with regards to employment status, or is IR35 reform just the beginning? In my opinion, it’s the latter – something that accountants should certainly bear in mind when advising their clients. 

In recent years, ‘false self-employment’, as it's often described, has been an issue high on the government agenda. When focusing on IR35, Westminster has taken the view that just one in ten contractors who ought to be working inside the rules actually are. 

Consequently, HMRC transferred the IR35 responsibility to the contractor’s client, with fee-paying parties now liable. It means businesses will be the subject of tax investigations going forward and expected to repay missing PAYE on contractors working as disguised employees.   

A similar version of these rules already exists for sole traders, who aren’t impacted by IR35. If a sole trader is engaged as a self-employed worker but HMRC takes the view the arrangement reflects employment, it will be the client held liable for employers NI, which totals 13.8%.  

It’s something often overlooked, with IR35 having grabbed the headlines in recent years. However, it’s a reality that businesses engaging sole traders must face up to – engage someone under self-employed status when, in reality, the relationship is employment and the tax consequences can be severe. 

And logic says the wider issue of employment status – among sole traders, not just limited company contractors – is something the government is ready to focus on. Here’s why:

A huge pond for HMRC to fish in

The sheer size of the sole trader workforce represents a big opportunity for HMRC, which is under tremendous pressure to raise revenue for the Treasury following the pandemic. Roughly speaking, the UK’s contractor workforce stands at around 1m, according to government data. In contrast, the number of sole traders operating on these shores is triple that, closer to 3.5m.

HMRC set to carry out employment status checks 

In theory, HMRC is ready to begin employment status checks among businesses immediately. IR35 compliance forms just one arm of the tax office’s employment status department. This means HMRC has everything set up and, unlike with IR35, the taxman doesn’t need to wait for the introduction of reform to ramp up its activity in this area. 

Landmark gig economy cases highlight problems

The difficulty faced (or lack of care taken) when setting the employment status of drivers by Uber will not have gone unnoticed at the tax office. Nor will the more recent Addison Lee case which, like the Uber Supreme Court verdict, granted drivers employment rights.

Granted, neither of these cases have direct tax implications. However, HMRC will be watching closely, poised to investigate firms that facilitate false self-employment to duck Employers’ NI and avoid other employer obligations, like employment rights. 

With the above in mind, I wouldn’t be surprised if the taxman looks to send out a signal of intent in the not too distant future by approaching a company engaging hundreds, if not thousands of self-employed workers. 

The upcoming PGMOL case, which is due to be heard next month, shows how keen HMRC are to record a high profile victory. Having lost at the Upper Tribunal, the tax office has appealed, determined to show that Premier League referees – who work as self-employed – are in fact employees of the football refereeing body. 

Accountants advised to take note

So why does this matter to accountants? Well, employment status is an issue that any business engaging sole traders must contend with. However, the problem is – and speaking from experience – it’s something that far too many firms are blissfully unaware of. 

The good news is that the same methods used to assess IR35 status can be employed when deciding employment status. By this, I mean a similar set of questions that determine a contractor’s IR35 status can be relied on to set the employment status of a sole trader. 

I imagine the challenge may lie in educating these organisations and opening their eyes to the issue. It certainly was with IR35, initially at least. That said, there is certainly an opportunity for accountants to provide vital advice, information and support to the businesses they work with.

Replies (4)

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By memyself-eye
28th May 2021 10:45

No doubt HMRC will cite 'employment rights' as a useful smokescreen to grab 'missing' employers NI.
Not every sole trader deemed an employee wants 'employment rights'!

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By dmmarler
28th May 2021 11:50

So, the refusal to take the simplest action and include NI with income tax is really to give HMRC an "open sesame" to investigate thousands of sole traders. More HMRC employees, more cost to the taxpayer, considerable time lag before the tax money is received (if at all), hassle for the Courts enforcing the debts, hassle for DWP processing claims for those falling on hard times. (We all have a fairly good idea of what sole traders' accounting records are like, then add the new diy accounting software advertised on TV.) This is bad publicity for any government - why can't they see this coming?

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Replying to dmmarler:
By tonyaustin
28th May 2021 13:49

HMRC will not investigate the sole traders any more that it will, from now on, investigate contractors using PSC's. The onus is on the payer. HMRC can carry out a single investigation of one employer who has paid hundreds of sole traders. If any seem to be employees, the employer is liable for the NIC and tax that should have been deducted under PAYE. If HMRC can trace the individual, a credit will be given for any tax or NIC paid on the income. This was a common practice up to about the 1990s, when tax rates made it viable to use a company and IR35 was introduced in FA 2000

Thanks (1)
Replying to dmmarler:
By tonyaustin
28th May 2021 13:49

HMRC will not investigate the sole traders any more that it will, from now on, investigate contractors using PSC's. The onus is on the payer. HMRC can carry out a single investigation of one employer who has paid hundreds of sole traders. If any seem to be employees, the employer is liable for the NIC and tax that should have been deducted under PAYE. If HMRC can trace the individual, a credit will be given for any tax or NIC paid on the income. This was a common practice up to about the 1990s, when tax rates made it viable to use a company and IR35 was introduced in FA 2000

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