Why IR35 Changes are Deemed 'Aggressive'?
Published: 09/10/2018
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We are writing this article for employers and recruitment agencies to explain the IR35 changes and their implications. The controversy causes miscommunication, which leads to conflicts between you and the contractors. The best way to proceed is by being empathetic. This is why we will try to help you understand the effect of this reform on the other party so you can tailor your future communication accordingly.
IR35 is the legislation designed to tackle tax avoidance by workers supplying their services to customers via an intermediary. It has been heavily criticised since its initial implementation in 1999. Industry bodies, tax experts and the business community have hailed it as poorly conceived and implemented. It’s also said to be causing unnecessary costs and stress for genuine and honest people about the work they deliver. While being highly unpopular previously, the announcement of rolling it out to the private sector in early 2020 has caused a new wave of uproar.
The government promised support to contractors and has delayed the legislation changes in light of the global pandemic. However, none of this has smoothened the impact. In fact, doubling down and providing employers and recruiters with a year to adapt but not offering such leniency to the contractors has only caused more controversy. Top of all, it has created a rift between all parties involved, shaking the market up.
While IR35 previously only covered public-sector workers, HMRC has now extended it to the private sector. Unsurprisingly, this move has brought with it even more criticism. Qdos Contractor, a tax insurance provider, has called on HMRC to rethink its “aggressive” approach to IR35 tax reforms. They call it a threat to self-employed workers at a time when uncertainty surrounding a no-deal Brexit already poses a big issue to independent professionals.
The global pandemic has only worsened the situation as many companies folded. It sent thousands of senior employees to pursue contracts over full-time employment. Our marketing manager confirmed they have been contracting from May 2020 to October 2020. This was due to massive competition for permanent roles and the inability to land one quickly while having to pay bills. Like many in the pandemic, they’ve lost their source of income due to COVID-19, which caused company bankruptcy. In other words, even though it was delayed, the roll-out of the IR35 changes was very poorly timed.
As The Register reports, these reforms are essentially seen as the government squeezing contractors for more cash. Generally speaking, the liability of determining IR35 status has been moved from the contractor to the company hiring them. In a survey of 650 contractors, it was discovered that 94% were under the impression that the government considered the self-employed to be a soft target.
Qdos chief executive Seb Maley pointed out that “contractors quite understandably feel targeted by the government and have been largely impacted by last year’s public sector IR35 reform. These individuals want a tax system that actually works for the self-employed.” Maley explained how the reforms are taking place at a time when big companies continue to underpay tax. Understandably, it is making contractors more resentful.
We have looked into these claims and discovered that, according to the figures shared by gov.uk, large businesses owed a total of £35.8bn in tax in 2021. £11.5 billion of it is suspected to be underpaid. Curiously, instead of investigating a potential foul play in the UK, the HMRC is pointing fingers at the foreign business. They are portrayed as the main tax offenders. Therefore, the HRMC declares the tax to be complex to claim back. According to Steven Porter, Head of Tax Disputes and Investigations at Pinsent Masons, the investigation of overseas corporations underpaying taxes is likely to intensify in the coming years. However, the independent UK-based contractors are being punished right now, with little to no investigation at all.
Another blow dealt to contractors by HMRC was giving private-sector employers a year to adapt to the IR35 changes. The ‘light touch’ approach entailed that businesses would not be penalised for accidental non-compliance for a year. On the other hand, the contractors would be held entirely responsible and, therefore, susceptible to paying a penalty from day one.
While some recruitment companies had begun adjusting their processes accordingly right away, others were in no such rush. Mainly because they knew they were in the clear for another year. Working with the latter meant the contractors wouldn’t be provided the needed support. the agency also wouldn’t chip in had they been penalised by the HRMC. Unfortunately, such behaviour turned out to be alarmingly frequent, damaging the contractors' relationship with the recruiters. The contractor survey held by The Global Recruiter has given a numeric estimate of this rift: 22% of the surveyed contractors trust their hirers to make the correct IR35 assessment.
The government claims to have taken steps to help contractors navigate the IR35 changes, but this is arguable. Many contractors are being placed inside IR35 incorrectly, which means they are taxed like employees while receiving none of the associated benefits. The official tools and guidance provided also proved to be highly inaccurate, contributing to the contractors' overall resentfulness.
The IR35 changes are critical to the contractors and directly affect their livelihoods. Yet the government would not provide a simplified explanation of it nor offer a designated training program. The key IR35 factors and the most critical tidbits to know are highlighted, written and published by independent sources. Much like this article.
With them not being government-approved, it is possible for the said articles to be either incorrect or even more confusion-infusing. If the contractor is penalised due to following a piece of advice found online, they cannot dispute the charge nor sue the source. The safer option would be reaching out to accredited IR35 specialists as it would offer a degree of warranty. Of course, a contractor could always invest their personal time in studying the legislation clauses in-depth on their own. That, however, would understandably be a time-consuming and risk-riddled task.
The claims that the government supported the contractors by equipping them with sufficient self-assessment tools were quickly dismissed. The tools were deemed ineffective. The government’s own Check for Employment Status for Tax (CEST) tool has been called inaccurate. The former HMRC inspector even called it “hopelessly unreliable and biased” and said it was not fit for purpose. In other words, although it is heavily implied that the contractors are empowered to self-assess, the reality proves to be very different.
Since the employing party wouldn’t be punished for a year of non-compliance, many employers were not in a rush to begin rethinking their processes either. This basically meant the contractors were to navigate through this themselves and risk penalties if they incorrectly self-assessed. That or pay an IR35 consultancy. With the rise in demand, the latter increased the service charge. In other words, the contractor would always be at the losing end.
Recruiters have a particularly big role in building the future of the contractor market. If the government fails to provide support, it is expected to step up and take the lead. They have the prospect of becoming a trusted advisor and a middleman between contractors and employers. Having failed, again and again, the contractors harbour little faith in being provided assistance. This is the chance for the recruiters to establish themselves as a trustworthy helper. Not only will this fix the relationship damaged by the legislation, but it will also strengthen it moving forward.
We understand that the new responsibility that’s befallen contractor recruiters is daunting. This is why, having been an aide for recruitment firms for over a decade, we have tweaked our software to help you with the IR35 changes. Starting in 2021, our approval module is no longer time rates-based only. It can now be used on the basis of deliverables, the factor that’s heavily emphasised when the HRMC is ruling out whether the contractor is IR35 compliant. However, we ask you to remember that Timesheet Portal is NOT an IR35 assessment tool.
Our platform was first created to aid the contracted workers and their employers, taking the process of invoicing online as opposed to relying on fax machines. We have been growing in the recruitment sector based on other needs, complaints and challenges every involved party faced. This is why it is only natural for us to introduce the changes to address some of the significant changes in the industry. At Timesheet Portal, we believe that while the changes in the legislation are posing an inconvenience now, they may become the beginning of a new era in contractor recruitment.
The IR35 changes are controversial for many reasons, including their timing and big companies seemingly getting away with insufficient and overall lack of guidance from the government. Also, huge fees are imposed due to non-compliance. However, these changes are not going to be revoked, so the industry must adapt to them. The IR35 has caused a rift between the contractors and the recruiting parties; however, it is also an opportunity to deepen previous relationships.
As a recruiter, you need to approach the matter with empathy. If possible, help identify whether someone falls inside or outside of IR35 and educate both clients and contractors on it. Putting their interests and needs first will establish you as a trusted advisor, boosting your reputation and credibility. Remember, your firm grows through helping others grow.
Begin adjusting your company today. We can help.
Disclaimer: The information in this article is provided to the best of our knowledge and serves as a general guide to the IR35 legislation. You should always make your own enquiries with HMRC or a qualified legal/financial expert in this area before acting on any of our advice.