UK government faces calls to end IR35 double tax anomaly

Meanwhile, Conservative stalwart calls to repeal law

Campaigners have called for the UK tax collector to respond to a consultation on how to avoid tech contractors paying a double tax while their status is defined.

Freelance workers – including many providing IT skills – who worked via professional services companies (PSCs) have been hit by the introduction of IR35, laws putting the onus of defining their tax status on employers.

The result has been the confused introduction of controversial tax legislation for off-payroll working – dubbed IR35 – that even the government's own departments have struggled to comply with.

An anomaly created by the new law results in His Majesty's Customs & Revenue (HMRC) failing to account for tax already paid when calculating the liability owed in the event of non-compliance.

When HMRC finds organizations have made errors in judging off-payroll workers' status, the employer is liable for tax and national insurance (NI) that should have been deducted from the fee paid to the off-payroll worker had the correct status been awarded. HMRC could get more tax than is due because the worker may have already paid tax and NI on the same income when they were judged outside IR35.

Tax advisors campaigning for clarity on the rules – and asking for their repeal – have called on the government not to sit on the consultation designed to close the loophole. It ended nearly a month ago, and the government is yet to respond.

Qdos CEO Seb Maley said: "Time is of the essence with this. The consultation is closed, and the government must move quickly to end the double taxation of IR35, which sees HMRC collect much more than it's owed. We've seen it time and time again when the government consults on something only to ignore the issue for years.

"The longer IR35 is double taxed, the more risk-averse businesses are likely to be and the more damage done to the flexible workforce. It's a relatively simple fix too. This is a fundamental flaw in this legislation – one that the government has been aware of for years and, amazingly, has done nothing about."

In February last year, public spending watchdog the National Audit Office pointed out the problem.

"HMRC collects the amount due in accordance with the law at that time. It does not offset the total amount against any tax the worker or their PSC [professional services company] already paid and told us this was not allowed within the current legislation. This means that HMRC collects more tax in total than is due," the report said.

"Once the non-compliant client organization accepts that its determinations were incorrect, the workers become entitled to claim back the tax that they and their PSCs have already paid. If they do, they in effect pay no taxes on that income because these are borne in full by the non-compliant public body. However, HMRC does not actively promote this and it is unclear how many workers reclaim their taxes in practice."

What is IR35?

IR35 is a reform unveiled in 1999 by the UK tax authorities. An April 2021 regulation change forced medium and large businesses in the UK to set the tax status of their contractors and freelancers. Prior to this, this had been set by the contractors themselves.

Contractors found to be within the scope of the legislation – i.e. 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 and are able to slash their tax bills by billing for their services through 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 £440 million ($486 million) 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 £1.2 billion ($1.33 billion) a year by 2023. Both public and private sector reforms had been set to be repealed before a U-turn in December 2022. Now both are back on the books.

Meanwhile, MPs outside government but within the ruling Conservative Party are positioning themselves for a likely post-election bloodbath by calling for a repeal of IR35. The prospect of a repeal was in the offing during the brief tenure of right-wing favorite Liz Truss. Since then, prime minister Rishi Sunak has ignored calls to scrap the law he introduced as chancellor in 2021.

Opinion polls and a spiraling mortgage crisis suggest the Conservatives are set to be voted out in late 2024.

This week Robert Buckland MP argued that Conservative voters are hit the hardest by IR35 rules. The former Lord Chancellor and one-time Secretary of State for Wales used the independent Tory news site Conservative Home to vent his views.

"With the next General Election fast approaching, another look at the off-payroll working rules would be an act of political expediency. The onerous regulations hit a natural constituency of the Conservative Party's hardest, and its support will be crucial for Conservative prospects come next Autumn," he wrote.

"As the Labour Party increasingly positions itself as the party of business, it would be foolish not to review IR35 as part of the party renewing its appeal to natural supporters."

It may take more than a vague commitment to repeal an unpopular tax law to rescue the Conservatives' fortunes at the ballot box. ®

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