No quick fix for HMRC's misunderstanding of IR35

We often get told it by government ministers, but their claim of ‘We’re all in this together’ doesn’t ring true to the business community if the Lords’ report on personal service companies is anything to go by, writes Martin McKechnie of contractor accountancy firm The Low Tax Group.

The main crux of the report shows a complete lack of understanding by HM Revenue & Customs of the actual impact of IR35. Many entrepreneurs, especially when starting out, need to supplement their income with contract work. And the intent of IR35 was to ensure that contractors were not artificially avoiding tax by resigning a PAYE job on a Friday and becoming a contractor at the same workplace on a Monday.
 

IR35’s raison d’etre? Very little evidence remains

Well, one can begin to understand the new calls for IR35 to be scrapped or suspended because the committee, in their report at point 67, speaks of “very little evidence” to prove that workers are leaving their 9-to-5 only to return a short time later in a ‘consultant’ role.

In fact, the only sector that seems to be still engaging in this ‘Friday to Monday scenario’ is, ironically, the NHS, where nurses and doctors are forced to work overtime through non-PAYE means.

HMRC targets those who aren’t tax-motivated

But the vast majority of contractors using limited companies do so for commercial reasons not tax reasons, which the Lords were told, notably by former accountant Stephen Herring, and which they acknowledge in their 66-page report.

This leads us to believe that HMRC are simply seeking a tax grab from Britain’s entrepreneurs and contractors to fund tax cuts for big business.

Let me explain. Despite recommendations endorsed by most industry and accounting experts that National Insurance be combined with tax, HMRC ignored this recommendation and focused on unfairly singling out contractors without being able to provide any accurate impact assessment of IR35.

Why we’re NOT all in this together

And although we support the cut of 8% in corporation tax, it seems grossly unfair that this has been given only to big business -- those outfits with over £1.5 million in profits. Britain’s entrepreneurs and contractors have had no reduction in corporation tax at all and so, on top of HMRC’s lack of understanding -- even of IR35’s impact, it clearly demonstrates that we are not ‘all in this together.’

What’s more worrying is that the tax authority seems determined to raise as much revenue from contractors as possible using IR35. This determination from HMRC is blind, as it comes with no consideration for the impact it has on talented workers trying to set up their own businesses which, eventually, are likely to reinvest in the economy and employ more staff.

No quick fix

Unfortunately for contractors hoping for a quick fix, I suspect that it will take at least 12 months to implement any significant changes recommended by the Lords due, in no small part, to the lack of credible information that HMRC has been able to provide so far.

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