HMRC: UK techies' IR35 tax appeals could take years

Challenges to blanket bans on PSCs could face long road to redemption

IT contractors who have faced blanket bans on employment via their personal services companies (PSCs) could face years trying to challenge the decision, according to officials from the UK's tax collector.

Speaking to members of parliament, Her Majesty's Revenue & Customs (HMRC) compliance director Nicole Newbury acknowledged that businesses implementing blanket bans on contracting PSCs could be found not to have complied with freelancer tax reforms, dubbed IR35, but challenging decisions could be a lengthy process.

The new rules, which place the burden of determining the tax status of freelancers on the employer, were brought into the public sector in 2017. They came into force for medium and large businesses in April 2021 following a report from the House of Lords, which said they were "riddled with problems, unfairnesses, unintended consequences."

What is IR35?

IR35 is a reform unveiled in 1999 by the UK tax authorities. The latest regulation change – which came into force in April 2021 – forces medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.

Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measures first came into effect in the UK public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.

As businesses prepared for the introduction of the new rules – which were delayed from 2020 to 2021 because of the COVID-19 pandemic – banks including Barclays, Lloyds, HSBC, Deutsche Bank, and RBS said they would not deal with PSCs because of the reformed IR35 leigislation, while aerospace giant BAE Systems was reported to have put similar restrictions in place.

Blanket determinations on employment status were not in accordance with the legislation and employers should make decisions on a case-by-case, HMRC chief executive Jim Harra told Parliament's Public Accounts Committee. If they did not, they risked being penalised and owing tax. Meanwhile, workers have statutory rights to dispute a determination.

Workers could also come to HMRC with anonymous complaints, he said. "We've had about 500 contacts with us from workers who believe that they have not been correctly treated," he said.

However, Newbury told MPs that if the employer engages with HMRC and there are no challenges, the process might take a few months. But if companies employing contractors refuse to engage with the process and later dispute it, she admitted it could take years.

The hearing followed a report by public spending watchdog the National Audit Office (NAO), which said UK IT contractors had been offered no guidance on how to claw back tax erroneously taken by employers under IR35 rules, which already cost central government bodies £263m when they failed to correctly adhere to the guidelines.

According to the NAO, the UK's tax collector has failed to clarify the controversial new rules which govern contractors' tax status, while there is no new legal framework to interpret the rules. ®

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