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Contracting in 2014: IR35, tax avoidance, Lords’ PSC inquiry and growth

Contractors faced a range of challenges during 2014 that included a raft of new legislation and intense IR35 and anti-avoidance activity by HMRC. Right at the end of the year, the government threw a curve ball with its consultation on umbrella employer expenses and draft legislation that could force a red tape nightmare on contractors who subcontract.

However, 2014 had more than its fair share of contracting positives. HMRC announced that the business entity tests (BETs) are to be abolished from April 2015. Then in October, ContractorCalculator published its ultimate IR35 strategy white paper, reviewing the last five years of IR35 and packed full of essential guidance.

During 2014, the contracting sector saw a surge of new entrants as self-employment continued to grow sharply. In response, PCG rebranded as the Association of Independent Professionals and the Self-Employed (IPSE) and a new ‘contracting tsar’ to represent contractors’ interests in government has been appointed.

IR35: business entity tests abolished, but the rules continue to be enforced

IR35 remains law and continues to be enforced. It is likely to be enforced for the foreseeable future. That is one key lesson that has arisen from 2014, and that has been reinforced in ContractorCalculator’s new whitepaper, IR35 after 15 years: Insights, analyses and strategies for contractors.

And this is despite the fact that HMRC is wasting taxpayers’ cash, as our analysis proved following data we secured from HMRC via a Freedom of Information Act (FOI) request. “If HMRC were a business, it would only be able to afford to pay its 40-strong IR35 compliance team about £1.06 an hour based on its own performance figures,” noted ContractorCalculator CEO Dave Chaplin on HMRC’s figures.

As if IR53 were not complex enough, during the year, some elements of the public sector decided to make up their own tests of employment. The BETs are widely and incorrectly used by many central government departments to judge a contractor’s IR35 status, and this resulted in some contractors being forced out of the public sector by the Ministry of Justice.

The BBC also unveiled its own employment test that was widely considered to be ‘useless’. But despite this, many self-employed BBC staff have been forced to pay tax as employees, despite being genuinely in business on their own account.

This pressure on public sector contractors has been entirely unwarranted. The Treasury’s own review of the use of contractors in the public sector demonstrated that 94% of all assignments are genuine and disguised employment and IR35 simply do not apply.

Lords’ PSC inquiry pours scorn on HMRC, but ignored by government

You could have been forgiven for thinking that IR35 and not the use of personal service companies (PSCs) was the focus of the House of Lords Select Committee on Personal Services Companies (PSCs) inquiry. The evidence gathering continued through to the spring, with the committee’s final report being highly critical of IR35 and HMRC.

But despite overwhelming evidence from hundreds of witnesses that IR35 could not be properly enforced, was failing in its objectives and costing taxpayers money, the government’s response to the Lords’ report was ‘lacklustre’ and ‘formulaic’. Worst of all, it confirmed that IR35 is here to stay for the foreseeable future and will continue to be enforced by HMRC.

If HMRC were a business, it would only be able to afford to pay its 40-strong IR35 compliance team about £1.06 an hour based on its own performance figures

Dave Chaplin, ContractorCalculator

Even HMRC’s own market research confirmed what was revealed about the use of PSCs by UK contractors in the Lords’ inquiry. According to HMRC research, contractors incorporate primarily to manage risk, with tax savings an important but a secondary driver.

Anti-avoidance legislation becomes increasingly wide reaching and draconian

Alongside the ever present threat of IR35, contractors faced a wealth of new tax avoidance legislation that started with the False Self-Employment legislation (also known as the onshore employment intermediaries legislation) early in 2014. It ended with draft onshore employment intermediaries reporting legislation published in December that could force a reporting nightmare on every contractor who subcontracts.

Fortunately early in 2014 HMRC confirmed that limited company contractors are not affected by the False Self-Employment rules as a result of a technicality. But in December, HMRC published draft legislation on how agencies should report when implementing the false self-employment/onshore employment intermediaries rules, and this will affect contractors.

Despite HMRC’s earlier denials that limited company contractors would not be affected by these rules, it now appears that any contractor subcontracting to another contractor or freelancer is now considered to be an agency.

This means that contractors will be forced to gather huge amounts of personal data and report quarterly to HMRC on any PSCs they sub out work to for a period of three years, even if the subcontractor is never used again. Failure to comply results in an instant £3000 fine plus £600 a day penalties for ongoing breaches.

IPSE, the Freelancer and Contractor Services Association and recruitment trade bodies have mounted a campaign to convince the government to make changes to exclude PSCs.

Will the umbrella employer consultation lead to an expenses crackdown?

Another year-end bombshell has been the new consultation on umbrella employer expenses, following Chancellor George Osborne’s rather unfortunate and factually incorrect comment in the 2014 Autumn Statement that: “We are also consulting on other measures including the use of so called ‘umbrella companies’ to deprive people of basic employment rights like the minimum wage and avoid tax.”

This consultation reads like the government has made up its mind in proposing only two options both of which will remove expenses tax relief from umbrella contractors, and the second proposes removing expenses tax relief from limited company contractors. Its timing over the Christmas holiday may also be deliberate so any legislation can be rushed through in time for the 2015 Budget.

Tax avoidance scheme users face mounting pressure

The very contractor-focused anti-avoidance measures have been accompanied by major changes to how tax avoidance is managed generally. The Disclosure of Tax Avoidance Schemes (DOTAS) legislation has been significantly strengthened.

HMRC has been granted draconian new powers including Follower Notices and Accelerated Payment Notices. This is despite a campaign to oppose the legislation that highlighted how tax avoidance schemes are completely legal and used in good faith by contractors.

The 2014 Autumn Statement included further anti-avoidance measures, including the aforementioned umbrella expenses consultation. Yet more DOTAS powers targeting large corporates could have the unintended consequences of driving many key contracting clients out of the UK to more tax-friendly jurisdictions.

IPSE rebrands as self-employment surges

Despite all the doom and gloom surrounding the swathes of new legislation introduced during the year, something else underwent a significant increase and that was the numbers of self-employed independent professionals.

According to the Office for National Statistics, the number of full-time self-employed workers in the UK has reached record highs. And research has shown that the new workers have chosen self-employment rather than being forced into it because they cannot secure permanent employment.

In the spring the European Forum for Independent Professionals (EFIP) recognised this Europe-wide phenomenon by publishing its Manifesto for Freelancing. The organisation formerly known as the Professional Contractors Group, and then PCG, rebranded again to become IPSE, and published its own manifesto.

Finally, on National Freelancers Day 2014 a new ‘contracting tsar’, Conservative MP David Morris, was appointed to champion independent professionals at the highest levels of government. Morris hinted that he “will be having meetings with the Chancellor very shortly” to discuss measures to improve taxation for contractors.

In early 2015, the issues to watch will be the:

ContractorCalculator is taking a break until 5 January 2015, when you can read what 2015 has in store for your contracting career in series of predictions by contracting sector experts. These include IPSE’s Simon McVicker, the Freelancer and Contractor Services Association ’s Julia Kermode, Parasol and ClearSky’s Derek Kelly and Abbott Moore’s James Abbott.

Lee Chant, Managing Director of Hays Information Technology, Andrew Bredin, Managing Director, Hays Construction & Property and Karen Young, Director of Hays Accountancy & Finance will all explain what they expect to see in IT, construction and finance recruitment in 2015.

We wish all our readers an enjoyable Christmas and a healthy, happy and prosperous 2015.

Published: 24 December 2014

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