Plunge in contractor numbers using IR35 tool

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Tom Herbert
Acting Editor
AccountingWEB
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Just 10% of contractors are now using HMRC’s IR35 status tool with accuracy issues continuing to plague the service, according to recent research.

HMRC’s tool, originally called the Employment Status Service (ESS) but later renamed Check Employment Status for Tax (CEST), has come under fire from contractors and industry bodies, who feel it is not fit for purpose.

Since the tool and the new legislation came into effect in April 2017, online contracting site ContractorCalculator has surveyed more than 6,000 contractors and found that just one in ten now use the tool, down from a high of 28%.

Of the 1,100 contractors surveyed who do use the tool, 25% are being given an “IR35 does not apply” result when ContractorCalculator believes it does apply. Approximately 24% are being given an unknown result when ContractorCalculator argues that two-thirds of the ‘unknowns’ are clearly inside or outside, but HMRC’s tool cannot determine this. 

In addition, 45% of the “IR35 does not apply” results are based solely on substitution and do not take any other factors into account. ContractorCalculator found that at least 25% of those given passes by HMRC, and passing substitution, were in fact found to be caught by IR35.

Claims ‘completely incorrect’

Earlier this year HMRC hit back at claims its updated tool is not fit for purpose, saying the argument is “completely incorrect”.

An HMRC spokesperson told AccountingWEB: “We do not oblige anyone to use the tool but we stand by its results where correct information has been inputted in line with the guidance. If incorrect information is inputted, the results will be skewed but that has nothing to do with the reliability of the tool.”

The damage has been done, chaos has ensued and now the tool is hardly being used.”

Commenting on the latest figures Dave Chaplin, CEO and founder of ContractorCalculator, said: “Substitution is very rare in the contracting market, so for HMRC to pass 45% of contractors based solely on substitution without considering other factors is not only contrary to how status is tested in the courts, but also in stark contrast to the reality of the working practices of most contractor engagements.

“The rollout of the IR35 reforms was underpinned by the promises made by HMRC that their CEST tool would provide public sector hirers, agencies and contractors with certainty. But clearly people have now lost faith in the tool. We know from a survey we conducted in the summer that 61% of contractors have turned their backs on the public sector because they refuse to work under IR35 off-payroll rules and now contractors have turned their backs on using the tool that HMRC built to underpin their IR35 Reforms. 

“The damage has been done, chaos has ensued and now the tool is hardly being used.  We would therefore urge HMRC to ditch the reforms altogether and conduct a proper investigation into what has happened. With the clear evidence building against them HMRC must now surely acknowledge that it is not well positioned to roll out the reforms to the private sector.”

About TomHerbert

About TomHerbert

Tom is acting editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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06th Oct 2017 10:06

And they want to introduceMTD.

Give me strength.

Had a generic notice from HMRC today re "unverified subcontractors".

They only gave a UTR and not a name. Client has some 50 subcontractors! I cannot be bothered to look for the UTR if HMRC cannot be bothered to give me a name.

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06th Oct 2017 10:06

[***] in [***] out eh.
Problem is the tool doesn't take into account every eventuality and work practice, so what do you expect?

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06th Oct 2017 11:19

And the problem is? There is a tool that HMRC have said they will be bound by the verdict providing accurate information is input. The article above says in some circumstances this will err on the side of IR35 not applying when it should - so why are contractors complaining and ignoring the tool? Seems a no-brainer to me - use the tool, get the verdict you are hoping for and protect yourself from challenge.
To me, the risk is all about whether the answers have been answered accurately - demonstrate you have done this and hey presto. Not doing the test does not seem to help in anyway!
It is only HMRC that are bound by the verdict of course. While the tool is not perfect by any stretch of the imagination (it can get the decision wrong in both directions depending on the circumstances), you can put your counter arguments as to why a verdict of IR35 applying should be ignored.

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to andy brookes
06th Oct 2017 12:11

Seems like a 'no brainer' to me. Use the tool, get the answer you want and then with HMRC on the back foot justify the responses.

I once saw an actual HMRC checklist of questions for an employment v self employment argument, there were 104 questions! The indicator tool cannot possibly provide a reliable answer in such a subjective area.

I had hoped that the new dividend tax (especially given the reduced £2,000 limit) would have ended IR35, sadly not it seems! Why not just increase the dividend tax to 11%/36%/42% for close companies and be done with it?

The tax system really needs to reflect 21st century working practices and to collect tax from businesses as they are, not as HMRC would like them to be. The rules should be functional, clear, consistent and simple.

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to Vaughan Blake1
06th Oct 2017 12:29

HMRC should steer clear of employment status. It's nothing to do with them. If they want a level playing field they should get rid of all NIC and just tax everyone the same.

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By cfield
to Vaughan Blake1
09th Oct 2017 11:42

Vaughan Blake1 wrote:

I had hoped that the new dividend tax (especially given the reduced £2,000 limit) would have ended IR35, sadly not it seems! Why not just increase the dividend tax to 11%/36%/42% for close companies and be done with it?

Because it impacts on people who are clearly outside IR35 as well as those who might be inside but won't admit it.

The dividend tax was not just a blunt instrument to make up for the failings of IR35. It was an out-and-out tax grab on the self employed who choose to work through their own companies (for commercial reasons as well as tax) and blatant double-taxation to boot.

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06th Oct 2017 14:45

@vaughanblake. Why should I and many others who are in business and taking risks have to pay the same rate of dividend tax as a contractor who allegedly does not?

Surely a higher rate of Corp Tax for those deemed to be in IR35 would be fairer. But tax has never been fair.

The dividend tax was to raise more money not to change attitudes!

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to pauljohnston
06th Oct 2017 15:10

In this day and age why should there be different rates of tax for different things. You can adjust the level at which tax becomes payable to allow for take. As in PA, CGT etc.
It's getting really out of hand and will have repercussions. We've already got contractors working on MTD leaving. What next? Is this Government blind or are they too busy stabbing each other in the back?

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06th Oct 2017 15:16

HMRC know that they cannot possibly check every single contractor themselves so the make the "employer" responsible with the threat of having to pay the tax they failed to deduct long after the contractor has left. This has the same effect it has on employers being asked to pay someone claiming to be self employed. The "employer" errs on the side of caution. With public sector contractors, the public authority can then make sure all contracts are inside IR35 so there is no argument and adjusts what the contractor is paid accordingly. HMRC get the NIC that they are really after with little or no checking needed. How many contractors provide their own contractual terms and working practices and make the client agree to them with no variation permitted?

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08th Oct 2017 20:00

The notion that contractors have no risks is nonsense. Clearly all the MTD contractors had the risk that working for a bunch of numpties would end badly.

In my own client base in the last 2 years I have had:

1. Contractors bullied into going PAYE.
2. Contractors bullied into going PAYE, only for the customer to change horses at the last minute and issue a new contract.
3. Contractors on a project all put on 3 day weeks whilst their PAYE chums in the next door seats just sat around playing solitaire etc.
4. One client put under great pressure to take his share of a "painshare" deal on a contract which had gone badly, legal advice indiactes he has no liability but will his contract be extended if he tells them to get lost? I somehow doubt it.

That's just off the top of my head. I have numerous non-contactor clients - including me - running limited companies who are in a much better place than most of my contractor clients.

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