Contracting in 2011 provided contractors with valuable lessons to take into 2012. The past year was dominated by tax and employment legislation: IR35, the demise of Employee Benefit Trusts (EBTs), a crucial BN66 ruling and the new Agency Workers Regulations (AWR) all hit the headlines.
The backdrop to the unfolding sagas of IR35 and AWR during 2011 was one of ongoing economic uncertainty and skills shortages. This actually worked in many contractors’ favour, fuelling increased contractor demand, and boosting the size of the sector by 10%, as confirmed by new research from PCG and Kingston University.
And it was a busy year for ContractorCalculator too, with the publication of new white papers on IR35 and AWR, an iPhone app, a new version of the free Online IR35 Test and publication of the Contractors’ Handbook on Kindle. These initiatives clearly had an impact, as the most recent independent ABC audit confirms our readership has increased by 20% to 133,141.
We said IR35 was here to stay: the Chancellor agreed
January 2011 saw publication of the final article in our IR35 Solutions series of articles, in which we discussed potential solutions to the challenge of IR35 being considered by the Office of Tax Simplification (OTS). ContractorCalculator CEO Dave Chaplin consulted with the Treasury over possible solutions, and our conclusion was that – for better or worse – contractors needed to get used to the idea that IR35 was here to stay.
During an exclusive interview in February 2011, OTS Tax Director John Whiting agreed that tax rules were failing contractors, and OTS recommended suspending or better enforcing IR35. In response to a Freedom of Information (FOI) request from ContractorCalculator, HMRC admitted that it did not actually hold some of the key data required for the Chancellor to evaluate the IR35 options on offer.
In the March 2011 Budget the Chancellor George Osborne decided to retain IR35, as predicted by ContractorCalculator. He created the IR35 Forum, comprising HMRC, contracting sector representatives and tax experts, to analyse IR35’s administration processes with a view to ‘improving’ them. That prompted the second ContractorCalculator IR35 series, which culminated in a prophetic white paper published in September: IR35: Better administration or enforcement?
The lesson for contractors from this lack of progress is not to let down their guard: the jury is still out on the IR35 Forum, but time is running out; the 2012 Budget is rapidly approaching, when changes are expected to how IR35 is to be ‘better administered’ or, more likely, better enforced.
IR35 rulings: a year of legal lessons
2011 was a bumper year for IR35 rulings. The MBF Design Services ruling against HMRC pushed the importance of mutuality of obligation (MOO) back to the fore. But the unique JLJ Services ‘split contracts’ ruling in December threw MOO back out into the cold again.
ContractorCalculator’s exclusive interview with JLJ Services contractor John Spencer highlighted Spencer’s contention that key evidence was disregarded by HMRC and, more worrying still, the tribunal judge. This further strengthens the case to thoroughly overhaul HMRC’s IR35 processes via the work of the IR35 Forum.
Several IR35 cases were lost by HMRC: ECR Consulting (May), Marlen (July) and Primary Path (July). In each case, analysis of the full ruling revealed that HMRC should never have taken these cases on, and that its contractor IR35 risk profiling was deeply flawed. The lesson for contractors is to nip IR35 investigations in the bud early on, and with expert assistance, before they become full blown reviews.
Although not an IR35 case, the Autoclenz ruling in July is worthy of note because it introduced a potential new factor to employment status cases. Based on the outcome, contractors should now be aware that a judge can completely disregard a written contract and evaluate employment status, and therefore IR35 status, purely on the nature of the working relationship with the client.
More legislation to restrict contractor enterprise: the Agency Workers Regulations
Contractors knew that AWR would come into force on 1 October 2011, but it was not until April that the Department for Business, Innovation and Skills (BIS) published guidance for clients and agencies. It has yet to publish promised guidance for workers themselves.
And it took until the following month before BIS confirmed that most limited company contractors would be outside of AWR’s scope, by virtue of being engaged in a profession or business undertaking. Umbrella company contractors were confirmed to be in the scope of AWR.
In response to increasing contractor confusion over AWR, and the results of a ContractorCalculator survey which showed over 50% of contractors had never even heard of AWR, ContractorCalculator, in association with Parasol, published a series of articles over the summer resulting in a white paper, Contracting and the Agency Workers Regulations.
Because the legislation has yet to be tested in the courts, the lessons for contractors remain inconclusive. Limited company contractors are likely to be out of scope. But it is ultimately the individual worker who ‘enforces’ AWR, and not a government agency. So the challenge may be persuading clients that contractors, wishing to stay out of IR35, won’t entertain the thought of claiming rights under AWR.
The power of Freedom of Information: IR35’s true story trickles out
Despite the best efforts of PCG and ContractorCalculator, HMRC has never revealed the full story behind IR35. But in 2011, that began to change. In March, a Freedom of Information Act (FOI) request by ContractorCalculator revealed that HMRC did not record the costs of individual IR35 cases.
Subsequent requests in September by an unknown source and PCG forced HMRC to open up on the tax yield generated by IR35. If these figures were a revelation, the FOI request by ContractorCalculator that forced HMRC to publish ten years of P35 ‘question 6’ data was explosive.
In the March 2011 Budget the Chancellor George Osborne decided to retain IR35, as predicted by ContractorCalculator
The answer showed that not only has HMRC been unfairly targeting contractors for compliance activity based on badly worded P35 questions, but it also appears never to have recorded an estimated £230m a year paid by tens of thousands of contractors directly as a result of IR35.
The lesson for contractors, who may have been unnecessarily paying much more tax than they needed to for many years, is not to roll over in future without seeking expert advice – the potential tax savings more than outweigh the cost of professional fees.
ContractorCalculator has grown during 2011, alongside the contracting sector
We’ve been busy in 2011, creating a stream of exciting new features and content, in addition to regularly updating our comprehensive range of interactive online calculators. And that’s in addition to our ongoing investment in high quality editorial news and features. In May, we launched ContractorCalculator’s first iPhone app, which offers contractors the latest content on the move. Watch out in 2012 for new features currently under development.
August saw publication as an ebook on Kindle of the hugely successful Contractors’ Handbook, written by former IT contractor and ContractorCalculator CEO Dave Chaplin. In September, this site’s Free Online IR35 Status Test for Contractors was upgraded to include new data on real IR35 cases from Qdos Consulting. Chaplin also provided a webinar for PCG’s National Freelancers Day webinar series.
The result of these developments has been a 20% increase in unique visitors to the site. The industry standard, independent ABC audit for September confirmed 133,141 unique visitors that month, and during 2011 ContractorCalculator achieved 1.3m unique visitors. We now have four years of consecutive audited visitor data, and remain the only contracting website to invest in regular, independent verification.
Dave Chaplin is a former IT contractor in the City of London, and is founder and CEO of ContractorCalculator, and author of the Contractors' Handbook.
Started in 1999, ContractorCalculator (this site) is the leading independent website for the UK contracting industry – most of whom are highly skilled knowledge workers.
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Our plans for 2012 include many new applications and enhancements to the website, so we can ensure that our readers are fully equipped to maximise their contracting potential, whatever challenges and opportunities the economy has in store for 2012.
Published: Monday, January 09, 2012
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