“The only way to fix IR35 is to make it irrelevant, by combining National Insurance Contributions (NICs) with Pay As You Earn (PAYE) income tax,” ContractorCalculator’s CEO Dave Chaplin told the House of Lords Select Committee on Personal Service Companies (PSCs) inquiry.
“We have been tracking IR35’s progress since April 1999, when ContractorCalculator.co.uk was first launched to provide contractors with information on the financial impact of the tax,” continues Chaplin. “And we can safely conclude that it has failed in its original objectives and remains a massive burden on the smallest of the UK’s businesses.”
The effectiveness of IR35
In his submission, Chaplin presented ample evidence that the legislation is not effective at collecting tax, should be removed as part of a restructuring of the UK tax system and imposes significant additional compliance burdens on small firms.
“We’ve conducted several studies based on the little evidence HMRC holds about tax yield resulting from IR35 – and it is pitiable. Even Office of Tax Simplification (OTS) director John Whiting told peers that IR35’s tax take is ‘derisory’.”
We have been tracking IR35's progress since April 1999, when ContractorCalculator.co.uk was first launched to provide contractors with information on the financial impact of the tax
Dave Chaplin, ContractorCalculator
Chaplin reinforced the position adopted by many of the witnesses so far, saying that “the only way to fix IR35 is to make it irrelevant by combining National Insurance Contributions (NICs) and Pay As You Earn (PAYE) income tax”.
The impact of the IR35 Forum
“There are few statistics available as to how the new IR35 regime [introduced by HMRC in May 2012] is working. We have repeatedly chased HMRC via Freedom of Information (FOI) requests to get some empirical statistics, but have been stonewalled for months,” wrote Chaplin, alerting the Lords to the fact that HMRC is refusing to give straight answers about its performance.
Not only that, but the data HMRC has released deliberately obfuscates its performance since May 2012, by only releasing information that includes IR35 tax yields from previous years.
As a result, it is simply not possible to answer the select committee’s questions asking whether HMRC’s post-May 2012 regime and the IR35 Forum’s activities are having a positive impact. Even the IR35 Forum’s non-HMRC members have criticised HMRC for its ongoing lack of transparency.
Is HMRC’s ‘improving the administration of IR35’ working?
The employment law underpinning IR35 is so complex that suggesting a simple guide can be created is a non-starter. This is a common solution suggested by those not knowledgeable about how IR35 works. It is not possible to build an objective set of tests that enables a layperson to determine IR35 status.
Chaplin explains: “We spent months designing and building an online IR35 Test in collaboration with employment law experts. From an original set of over 100 questions we finally managed to boil our test down to 53 questions across 8 key areas of case law. And even then we could only manage to deliver results in one of five categories: Pass, Borderline Pass, Borderline, Borderline Fail, Fail.”
HMRC introduced the Business Entity Tests (BETs) as a tool for both contractors and HMRC to determine the level of IR35 risk. However, the BETs bear little resemblance to business reality, let alone the principles underlying IR35.
“We conducted a survey of over 10,000 contractors during February 2013, which clearly showed how poorly the BETS aligned with IR35,” continues Chaplin, “and how many contractors HMRC is likely to be falsely targeting with no hope of proving IR35 applies as a result.”
In addition to his written evidence summarised above, Chaplin also included details of the 50,000 Online IR35 tests taken by contractors since 2010 and links to ContractorCalculator’s IR35 white papers: