IR35 serves no useful purpose and should be abolished for contractors, but a mechanism should be introduced that requires engagers to pay employers’ National Insurance Contributions (NICs) when the worker passes the tests of employment and should really be employed.
This would be the best outcome of HMRC’s IR35 Intermediaries Legislation discussion document, according to IR35 expert David Kirk of David Kirk & Co., author of Employment Status - the Tax Rules.
He believes that following the Dividend Tax changes, contractors will be paying a fairer share of tax but the end-user engagers won’t be paying their fair share of payroll taxes, and this is what policymakers need to understand when deciding IR35’s fate.
“The current IR35 rules require contractors to pay more than their fair share of tax liabilities. The Intermediaries Legislation should be replaced with new rules that use consistent tests of employment, such as asking whether supervision, direction or control exists as in the agency legislation, alongside a mechanism that makes engagers pay.”
IR35 is ‘broken beyond repair’ and should be replaced
Kirk highlights that in the Summer Budget, the Chancellor George Osborne tasked HMRC with “improving the effectiveness” of IR35. Instead, Kirk’s view is that the legislation is “broken beyond repair” and that it should be replaced.
He explains: “The issue of employment and employment taxes is currently dealt with on a piecemeal basis. We have diverging employment status tests where a contractor could be determined as employed using the common law test and self-employed when examined using the agency rules.
“The issue is of employment status, and the Office of Tax Simplification (OTS) produced a brilliant report on the topic the results of which confirmed that the whole issue needs to be looked at in the round, and not just by HMRC and the Treasury.
“Now that we have a single party government, ministers may be brave enough to grasp this nettle and initiate a prolonged consultation lasting as much as a year that includes all stakeholders, including the Department for Work and Pensions (DWP) and the Department for Business, Innovation and Skills (BIS), covering all employment status matters as the OTS recommended.
“Any agreement would be hard won, but if everyone agreed then it would resolve the IR35 issue and the ‘elephant in the room’, which is employers’ NICs.”
How would placing the tax liability on engagers actually work?
Kirk notes that in the original IR35 proposals by the then Inland Revenue back in 1999, it was engagers who were to be responsible for implementing IR35 and collecting any resulting tax liabilities. However, fierce lobbying by big business ensured that this original concept was removed and the liability placed on the worker.
“We currently have a situation where the major beneficiaries of using large temporary workforces via limited companies and umbrella companies are public sector engagers and large companies because they are not paying any payroll tax.
“There are the complications of having multiple stages in the chain between workers and engagers that include additional payments such as agency margins and umbrella company fees which Pay As You Earn (PAYE) cannot cope with.
“But big business is geared up to cope with this level of complexity and it is possible to design a system where engagers can pay their fair share of NICs.”
Educating policymakers is the key
By proposing that engagers could once again be in the frame for enforcing IR35 or its replacement, HMRC is proposing to go back to the solution it identified in 1999. But Kirk says that the original idea causes problems too.
“Everyone would agree that at the moment we have under-compliance with IR35. However, making engagers responsible could result in over-compliance. Whilst HMRC would not worry about this, the Treasury and government might. If the workforce becomes less flexible as a result, then there is a problem. Even HMRC says flexibility is a good thing.
Kirk concludes: “Educating politicians is vitally important here, as everyone knows that IR35 is unworkable – you just have to look at the latest performance figures.
“And I have seen too much of the human cost, with contractors under IR35 investigation facing financial ruin, being beggared in retirement and even going through relationship breakdown and divorce. There is a better solution, and that is to abolish IR35 and ensure engagers meet their payroll tax obligations.”