Is IR35 really unfair for contractors?

IR35; HMRC’s controversial legislation designed to go all-in on tax evaders is a hot topic now more than ever. Since its decision to infiltrate the private sector this coming April, contractors have been riled up over the new changes which they view an imminent threat to the way they work. In February of this year, around 500 freelancers and sympathisers took to the streets to voice these widely felt frustrations. Vehemently protesting at the Houses of Parliament with placards reading ‘IR35 will close my business’, ‘Work longer, pay more, get less- no thanks’, and ‘Bad for business, bad for Britain’ it’s clear that relations between HMRC and the contingent workforce are at an all-time low. Though the prospective policy-change has left many contractors feeling hard done by, tax evasion is an undeniable issue that continues to plague HMRC. In fact, in 2019 £35 billion was reported in tax losses, the highest figure since records began back in 2008. It’s a two-sided dilemma that’s still being debated nationwide as we await the big shift this coming spring. Whilst temporary workers seem to have unanimously made up their minds on the matter, the question still remains: is IR35 simply unfair on contractors?

End-hirers reacting out of fear: unfair consequences for contractors

One significant change which has already caused a stir is the transfer of responsibility for determining IR35 status. The obligation, currently that of the contractor’s, will soon be sent right up the supply chain to the end-hirer and is one that many are simply unwilling to take on. With the power for HMRC to backtrack tax payments for up 20 years and the threat of hefty fines, fear of mistakenly stepping out of line has cornered many companies into enforcing a blanket ban of limited company contractors. Whilst their refusal to provide work outside of IR35 is a better safe than sorry approach for the hirer, it’s a scenario which will unfairly tax the contractor under PAYE whether the collective working situation calls for it or not. The climate of fear which the IR35 changes are already bringing about is expected to trap many genuine contractors into ‘deemed employment’, the lesser of the two evils between unfair taxation and losing out on work altogether.

Do the ‘unfair’ IR35 changes mark the death of contracting?

This blanket ban reaction is one aspect of several under the renewed legislation which is causing chaos for contractors. Whilst their wages will be deducted as that of a regular nine-to-five worker’s would be, they will remain without the usual employee benefits such as sick pay and annual leave despite less working hours and more often than not- less take-home pay. This has forced many flexible workers to up their rates in order to stay financially afloat, though it often ends up adding more fuel to the fire in the growing reluctance to hire contractors. Whilst the government claims that it “does not want to take away [the] flexibility” of working through intermediaries (i.e. one person limited companies) such issues lend a degree of validly to the widely shared concern that the new legislation simply spells the death of contracting.

Who’s really to blame?

However, should the legislation itself be to blame when after all it’s the end-hirers opting out of responsibility? According to Michael McCartney of the law firm Fladgate only 10% of contractors are complying with the current rules and and he also says that  this “is a clear indication that reform is needed”.  Of course, tax avoidance remains an issue in both the private and public sector and some may argue that demonising a policy which simply seeks to tackle it is unwarranted. In the view of many, it’s the end-hirer’s refusal to engage with guidelines which is interfering with flexible working rather than the guidelines themselves. Conversely, it can be said that little is being done to combat this on HMRC’s part which is an issue within itself, though it’s certainly not enough to justify an outright cancellation which many are calling for.

Tackling tax evasion- Eamonn Holmes vs HMRC

In a number of cases, IR35 has proven to be an effective tool in catching out intentional tax evasion and retrieving owed capital to HMRC. So-called ‘disguised employees’ will often curb the system, carrying out the same Monday to Friday job through a contractual arrangement, resulting in them paying less tax than a PAYE employee would within the same position. This unfair disparity has been a significant motivator for the new IR35 changes which aim to weed out such incidents of deliberate deception.

A rather high profile example proving its potential for success was the recent case with This Morning presenter Eamonn Holmes who lost against HMRC, claiming to be “totally freelance” or ‘outside of IR35’, in his work for ITV. After finding sufficient mutuality of obligation and a strong general framework resembling employment, the well-known TV host was ultimately deemed an employee of ITV for tax purposes. Having been unlucky enough to be caught before the policy renewal this April, Holmes himself will be responsible for paying the eye-watering £250k fine rather than his deemed employer ITV, which would have been the case had he been caught after the set date.  As one of ITV’s highest earners, (ranked no.1 in 2011’s highest-paid TV stars) Holmes will have inevitably dodged a significant amount of tax since commencing his evasive contract. With PAYE employees on much lower salaries being taxed at each paycheck, cases of this nature do indeed highlight the unfair discrepancies that creatively worded contracts enable, and thus IR35 has the potential to be a powerful tool going forwards to combat this kind of illicit working arrangement.

Fine-tuning IR35 for a fairer future 

Like that of any new policy, the next incarnation of IR35 will inevitably have initial flaws and imperfections to be addressed. Whilst it’s been proven to be effective in high profile cases regarding larger paychecks, doubts and reservations remain. Average wage contractors are currently facing a big financial hit should they be caught up as collateral damage whilst IR35 is still being fine-tuned and as a result, could cause problems throughout the contingent workforce. Whilst it’s an essential policy to have in place, there is work to be done in making sure it zones in on tax avoidance, without interfering or even causing damage to the (presently fearful) flexible-workforce.

Read part two here

Need help adjusting your business to the new changes? Check out IR35 Risk Management on ENGAGE