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Have Off-Payroll IR35 reforms rendered contractors guilty until proven innocent?

The taxman has been accused of manipulating IR35 so that contractors are considered guilty until proven innocent, overriding the rule of law whereby HMRC is required to discharge its own burden of proof to show that a contractor is caught by the legislation.

The Off-payroll working rules for public authorities have incentivised many public sector hirers to blanketly assume that their contingent workers are caught by IR35; a position that they will be reluctant to budge from unless the contractor can convince them otherwise beyond doubt. As a result, thousands of contractors are believed to have been forced into false employment and subject to wrongful taxation.

This is the argument put forward by ContractorCalculator CEO Dave Chaplin, who explains: “The way that the off-payroll rules are structured makes it so difficult for a contractor to secure a fair assessment. Although it’s not written in the legislation, it’s almost a deemed provision that contractors are to be considered caught until they have proven the contrary – or guilty until proven innocent.”

What is a ‘deemed provision’?

“A deemed provision is a specific type of provision within a tax code,” explains James Abbott, head of tax at contractor accountant Abbott Moore. “Bizarrely, it treats a situation as existing even in instances where it evidently doesn’t.

“Deemed provisions are often written into law to force a particular tax outcome where the legislators wish them to apply. Essentially, they mean that, if you meet certain criteria as stipulated within tax legislation, you can be taxed accordingly, even if you can prove that your circumstances wouldn’t usually warrant it.”

Abbott shares a hypothetical example where a deemed provision is applied to what we will call the Economic Dependence Tax (EDT). The EDT has historically applied where an individual offers their services to a client via a limited company but their working arrangement replicates one of employment.

However, the taxman has added a deemed provision to the EDT, which states that if a contractor spends at least 80% of their time over a six-month period with a single client, they are deemed caught by the EDT on that income.

To ensure that the EDT doesn’t apply, a contractor working through an intermediary must now prove that:

  1. The hypothetical contract between their company and the client couldn’t be deemed one of employment
  2. They haven’t spent 80% or more of their time with a single client over a six-month period.

“The contractor’s arrangement could leave them well outside of the EDT as it currently stands, but if they fall foul of the added stipulation, they would be deemed caught by the EDT” says Abbott.

As the example demonstrates, deemed provisions often widen the net of tax legislation, increasing the risk that individuals who wouldn’t ordinarily be caught by the normal provisions, suddenly, and unjustly, come within scope.

Challenging a deemed provision means proving a negative

Abbott continues: “Stepping outside of the tax context for a moment, a deemed provision would be like saying that, because someone has found buried treasure within 200 metres of your garden boundary, you have treasure in your garden as well. The fact that your garden has no treasure is somewhat irrelevant. You are deemed to have treasure by that law.”

Abbott explains that, to avoid the deemed provision in this scenario, you would have to prove one of the following:

  1. That your garden isn’t a garden
  2. That your garden isn’t within 200 metres of the buried treasure
  3. That your neighbour hasn’t found treasure.

“You could positively prove that there is no treasure in your garden by excavating it, but that wouldn’t be the point. Confusingly, challenging a deemed provision means proving a negative.”

“This is always much harder than a positive,” adds Chaplin. “For example, I can prove there is treasure in my garden by finding one small sample on a single dig. To prove there is no treasure I need to conduct an expensive archaeological dig of the whole garden.”

Have off-payroll rules introduced ‘deemed provision by proxy’?

The notion that an individual can be deemed guilty until proven innocent is a contentious one. However, this hasn’t deterred HMRC, which has enjoyed success with its Accelerated Payment Notice (APN) scheme, whereby those believed to have engaged in tax avoidance schemes are required to pay penalties up front before being proven of wrongdoing.

There’s a strong argument to be made that, with the off-payroll rules currently governing the public sector, HMRC has created a new form of deemed provision by proxy which is resulting in false employment. Chaplin explains:

“HMRC has effectively instructed public sector hirers to assume that all contractors are caught by IR35 unless the contractor can convince them that IR35 does not apply. This task is made even more difficult for the contractor by the fact that the hirer leaves themselves open to back taxes and penalties in every instance where they place a contractor outside of IR35.

“Inevitably, the large majority of public sector hirers have taken the default position that their contingent workers are caught by IR35, imposing blanket rules which are destroying the livelihoods of many contractors.”

The argument isn’t without substance. Contractors have left the public sector in their droves in response to hirers deeming entire contingent workforces to be caught by IR35. Not only this; a procurement manager in a Government public service disclosed to ContractorCalculator the IR35 position held by management at his former place of work:

“It was the contractor’s responsibility to do that [assess their IR35 status], the [firm name] took the stance that everyone was in scope unless they could prove otherwise.”

Off-payroll rules: ‘taxation by fear, not fairness’

Abbott points to the imbalance in risk and reward between the hirer and the contractor as a key contributing factor: “In the public sector, when a contractor is deemed to be inside IR35, the hirer is not the one paying the tax. In many cases, they aren’t even paying their employer’s National Insurance (NI) liabilities, as this is often passed onto the contractor by way of a reduced rate. So, the hirer has nothing to lose.”

He adds: “Compare this with the potential tax liability when HMRC challenges an ‘outside IR35’ evaluation, and it’s clear that the off-payroll rules are taxation by fear rather than fairness.”

According to Ken Phillips, executive director of Self Employed Australia (SEA), the arrangement mimics the punitive approach taken by the Australian Taxation Office (ATO):

“The structure of the legislative powers of the ATO is reverse onus of proof. The ATO makes a decision or ‘forms an opinion’, and that decision or opinion is considered law. The taxpayer’s task is to disprove the ATO, which is under no obligation to explain or defend its position.”

The ATO’s abuse of its powers under this regime has led to it being accused of fraud. As Phillips points out, HMRC could soon follow suit: “The irony is that, while we are campaigning for a tax structure which more closely resembles that of the UK, HMRC seems insistent on replicating a tax system which has caused so much controversy in Australia.”

Join our IR35 campaign [Stop The Off-Payroll Tax]

ContractorCalculator is actively campaigning to put a stop to Governments plans to expand the public sector IR35 reforms to the private sector.

To support the Stop The Off-Payroll Tax campaign against IR35, please subscribe to our mailing list, and help raise awareness by following the instructions set out on the website. Please follow or connect with our CEO Dave Chaplin on LinkedIn. Dave regularly posts about the IR35 reforms and is an essential contact to have for keeping abreast of the latest news surrounding the legislation.

[Editor (20/5/2020): The campaign was started by ContractorCalculator in 2018, and formalised under the branded campaign "Stop The Off-Payroll Tax " in March 2019. The copy and links above have been changed to reflect that.

Published: 12 June 2018

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