Government must legislate to uphold the promise made by HMRC not to retrospectively target contractors deemed by clients to be within scope of the Off-Payroll legislation. Failure to do so would risk a labour market crisis, says ContractorCalculator CEO Dave Chaplin.
The warning comes after hundreds of contractors descended upon Westminster last week for a Stop the Off-Payroll Tax protest. In an open letter to now ex-Chancellor of the Exchequer Sajid Javid, the campaign called for a halt to the legislation, warning of its adverse effects, including the offshoring of work and exploitation of contractors.
Though a complete U-turn appears unlikely, Chaplin notes that there is at least one concession Government can make to mitigate the devastating impact of the Off-Payroll legislation on the labour market:
“Potentially hundreds of thousands of contractors are to down tools and abandon projects as a result of Government’s ill-conceived proposals. A key factor behind this decision for most contractors is concern that HMRC will investigate their historical tax affairs if they agree to work for their current client ‘inside IR35’. If Government were to legislate to prevent HMRC from doing so, it would encourage at least some contractors to remain in the sector, and not bench themselves unnecessarily.”
91% of contractors don’t trust HMRC to stand by promise
The taxman has previously promised only to use information gained as a result of the Off-Payroll legislation prospectively, stating in a recent policy paper: “HMRC has taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.”
However, experts have advised caution and have encouraged contractor’s to take the taxman’s words with “a large pinch of salt”. In more recent guidance, HMRC has stated it would only retrospectively target contractors where it suspected fraud. As Chaplin highlights, this provides a sizeable caveat:
“Anyone can have a suspicion. HMRC could make this accusation whenever it sought to investigate. It would make more sense to investigate only in cases where fraud is proven. This use of language is synonymous with the Loan Charge scandal and is exactly why nobody trusts HMRC anymore.”
Unsurprisingly, indications suggest that many contractors are unwilling to take their chances. Last week, a study of circa 1,500 contractors by inniAccounts and offpayroll.org.uk revealed that 53% were planning on abandoning clients before April 2020. When asked why, 91% highlighted mistrust of HMRC, with the report forecasting a £2.2bn productivity gap during the first half of 2020 resulting from the turnover of self-employed.
“Quite rightly, nobody trusts HMRC to stay true to its word,” says Chaplin. “Along with the legislation itself, this mistrust of HMRC is set to cost the economy millions. This is a completely avoidable embarrassment created by the supposed ‘party of business’.
“If HMRC genuinely doesn’t intend to retrospectively target contractors, then Government can provide contractors with certainty by writing this promise into statute. This would at least stem the needless exodus of contractors from their clients, paving the way for continued engagements following the sensible renegotiations of contract rates.”
Taxman’s track record fuels contractor mistrust
Cynicism of HMRC is not unwarranted. Taxpayer trust in HMRC has nosedived recently, due in large part to the taxman’s administration of the Loan Charge. HMRC’s aggressive pursuit of contractors through the controversial legislation, which permits the taxman to impose retrospective tax bills spanning back as many as 20 years, has devastated the lives of many of those affected.
In 2018, evidence of HMRC’s administration of the Loan Charge was presented before the House of Lords, resulting in an Economic Affairs Committee report which called for a Government review of the taxman’s powers.
Meanwhile, HMRC has continued to display its aggressive tendencies in its preparation for the private sector Off-Payroll extension. Late last year it emerged that the taxman had issued a batch of letters to GlaxoSmithKline (GSK) and thousands of its current and former contractors, requesting information about engagements from the pharmaceutical giant while accusing contractors of IR35 non-compliance.
“If HMRC’s recent track record is anything to go by, contractors are right to take every precaution. And if Government is unwilling to provide the UK’s contingent workforce with the necessary protections, the adverse impact of the Off-Payroll legislation will be felt a whole lot harder.”
Chaplin concludes: “Putting HMRC’s promises into statute should prove a simple exercise, and would be a perfect litmus test as to whether the taxman’s claims are credible and can be trusted.”