Has HMRC admitted that contractors are now paying unnecessary taxes?

Recourse for contractors whose Off-payroll status has been incorrectly assessed appears not to be a priority for the government, according to contractor service specialists

A recent HMRC report revealed that a third of businesses working with contractors had spent little or nothing on ongoing costs to comply with Off-payroll rules, more commonly referred to as IR35. In that same report, over half of organisations said that all of their contractors fell entirely outside or inside the rules, but “this is very rarely the case,” according to Matt Fryer, MD of contractor accountancy and services firm Brookson Group.

No recourse for those who have been incorrectly assessed

“This suggests that a significant number of the 130,000 individuals who have been moved to payroll as a result of the reforms may have had contracts incorrectly categorised as inside IR35 and are now paying unnecessary employment taxes,” says Fryer.

Fryer continues, “HMRC seems keen to highlight that this represents just 2.5% of the total self-employed workforce and less than 1% of the total workforce. Is this an indication that the Government is content with the unfairness of this outcome?”

Andy Chamberlain, director of policy at self-employment trade body, IPSE, revealed in a previous report that the lion’s share of the additional tax burden imposed by an incorrect status determination is Employers National Insurance, which the contractor cannot claim back despite having paid it indirectly. As for going to a tribunal, Chamberlain says the costs are becoming “stratospheric – it’s completely unaffordable.”

It has also been highlighted by Chamberlain that HMRC can “retrospectively collect tax from a client or agency if it determines that IR35 should have applied.”

However, no consideration is given as to whether tax has already been paid on that income by the contractor, creating “a clear risk, likelihood even, that too much tax will be collected in total,” he said in another report.

Fryer says that although only around 10% of end clients represent around half of the total “compliance spend”, there seems to be no analysis in the report around compliance levels across businesses. “This feels like a major oversight,” says Fryer.

“The other major concern is that a significant number of hiring businesses could be sleep-walking into tax compliance issues, as HMRC now actively pursues enforcement activity,” he says.

“The third of end clients who continue to engage with PSCs without ongoing compliance costs may have misunderstood the ongoing requirements of the legislation,” says Fryer.

There seems to be a wide divide between clients who are doing their best to remain compliant and fair to contractors when making Off-payroll worker status determinations and those that have done little to change since the rules came into affect.

For example, Dave Chaplin CEO and founder of tax compliance firm IR35 Shield, says the HMRC report claims that up to a quarter of firms only incurred up to £999 cost to implement the reforms does not tally with the figure that over half of the firms had external legal help or lawyers.

“You won’t even get one day of a lawyer for £999. We know firms that spent more than six figures,” says Chaplin.

Chaplin also does not believe that the HMRC report paints an accurate picture of the impact that the rules are having on contractors or UK businesses. You can read Chaplin’s recent opinion on the matter, here.

Single enforcement body put on hold

The HMRC Off-Payroll impact report comes just as the Business secretary Grant Shapps has said that plans for a “single enforcement body” for labour laws have been shelved for now.

Crawford Temple, CEO of Professional Passport, an independent assessor of payment intermediary compliance says “It is disappointing that plans to introduce a Single Enforcement Body have been put on the back burner, however I am not entirely surprised as it was always going to be complex to achieve. 

Temple says with plans shelved, it is more vital than ever that the Government now demonstrates its “commitment to stamping out non-compliance and malpractice in our industry.” 

“It is shocking that schemes that lure contractors into financial hardship when they can ill afford it are allowed to thrive,” says Temple. “The Government continues to drag its feet on taking visible enforcement action to find the perpetrators of these schemes and close them down – more resources and investment are needed if we are to clean up an industry that continues to attract negative headlines,” he says.