Empowering the Freelance Economy

Government IR35 study reveals extra taxes likely being raised “unfairly”

A growing number of contractors that want to stay independent and not be forced to into inside IR35 roles are taking their talent overseas/ Photo by Helena Lopes via Pexels
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Following the publication of the government and HMRC joint report on the introduction of IR35 reform in the private and voluntary sectors, IR35 experts have highlighted what they see as a “red herring” which indicates that freelancers, contractors and the self-employed are not treated with the same respect and care as other taxpayers, despite their significant contribution to the economy.

According to the government report, IR35 reform has generated an additional £1.8bn in tax revenue. This increase is attributed to increased tax receipts from PAYE Income Tax and National Insurance, and reductions across Corporation Tax, Self-Assessment Income Tax, VAT, and tax on dividend payments, according to contractor insurance firm Qdos.

However since the report came out, experts have pointed out that the amount of revenue raised by contractors being wrongly placed inside IR35 or forced to operate on payroll is not currently being explored by HMRC. 

Given how many contractors have been blanket banned or even just mistakenly placed inside IR35 or onto the payroll by businesses, you are left to wonder how much of this extra tax has been raised fairly.

Seb Maley, CEO of Qdos

Is tax being raised fairly?

“The government revealed that £1.8bn in additional tax revenue has been raised as a result of IR35 reform,” says Seb Maley, CEO of Qdos. “But given how many contractors have been blanket banned or even just mistakenly placed inside IR35 or onto the payroll by businesses, you are left to wonder how much of this extra tax has been raised fairly,” he says.

“It’s something the government has failed to address, not just in this study, but in the countless consultations and reviews prior to this. Understanding this is fundamental to gauge the success of the off-payroll working rules. As it stands, the government simply looks at the top line figure as a measurement – a figure which is a bit of a red herring,” says Maley.

Maley says he is not aware of any action to be taken by HMRC to ensure that any contractors that have overpaid tax as a result of being incorrectly assigned as inside IR35 will see their refund in full or how that process would even work.

“As far as HMRC is concerned, the more tax that the reform raises, the better – even if it means that contractors have been wrongly placed inside IR35 or on the payroll,” Maley tells The Freelance Informer.

“The government has its head buried in the sand, failing to acknowledge the true impact of the changes,” says Maley.

Blanket bans and ‘inside IR35’: the true cost to the British economy

Fellow IR35 expert, Dave Chaplin, CEO and founder of tax compliance firm IR35 Shield says if a firm does not want to hire contractors who operate via limited companies, they do not have to.

“Many large firms decided they did not wish to take on the tax risk, so effectively blanket banned,” he says.

“Whilst there is a statutory requirement to implement a client-led dispute process for contractors who are told they are ‘Inside IR35’ and issued with a Status Determination Statement, many firms don’t bother. Instead, they just advertise the engagement has on-payroll only, via PAYE or umbrella,” says Chaplin.

“There are some firms who do hire ‘Inside IR35’ whilst the contractor is still using their limited company, but there is no effective mechanism to challenge this decision. The client just marks their own homework,” he says.

“In the original consultation, it was proposed that there would be a statutory route to appeal status decision, but that never happened.

“Where firms hold the bargaining power, they can basically dictate to the contractor, and misclassify them, and there is really nothing the contractor can do, other than vote with their feet.

“We are seeing many contractors work remotely now for overseas companies because the new rules do not apply. This means UK-based firms are unable to access the talent they need, and/or need to pay more for it,” says Chaplin.

Tax refunds: are they easy for contractors to get back?

  1. XY says

    HMRC said in consultations that they would “actively prevent blanket determinations” or words to that effect. Of course, they did no such thing, as ever.

    There are other deterrents though, such as agencies now adding clauses into outside IR35 contracts that the contractor will indemnify the agency against “losses from PAYE” – passing the payer’s responsibilities back to the worker.

    Qdos insurances don’t cover this (why not?) although a competitor’s offering does (Kingsbridge) – not sure about any others. I’ve lost confidence in Qdos over recent years, they used to seem to stand up for the contractor, but in the end you come to realise that all these firms have a vested interest in IR35 continuing… so that they can sell us more insurances and “expert opinions” (which we should learn to read as “vested interests”).

  2. Andrea says

    Will HMRC publish how much hey have lost in VAT from Banks and Insurers since IR35 rules were blanket applied to contractors within those industries?

    I’d like to see that offset against the 1.8 billion reported gains.

  3. Stewart says

    Many consultants in the civil engineering profession had to increase rates to keep contractors – this was then passed on to clients like National Highways and Network Rail etc – were these calculations included in the so called tax savings HMRC claim to have made ? Somehow I don’t think so

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