Guest blog by AnthonySherick, MD of ContractorUK
Yesterday it was announced that presenter Lorraine Kelly has defeated HMRC in the latest IR35 ruling over a £1.2m tax bill. The judge ruled that she was not employed by ITV, but rather performs as her“chatty” TV persona. Lorraine Kelly received the national insurance and income tax bill from HMRC in 2016 claiming she was an employee of ITV and so fell under the umbrella of IR35 regulation. However, the judge ruled that she was in fact self-employed, as she had claimed.
IR35 was introduced by HMRC to ensure that contractors pay the correct tax. The legislation was specifically created to target contractors who supply their services to businesses via a Personal Service Company (and are therefore exempt from employee tax), but who would otherwise be considered an employee of that business if the intermediary was not used. Labelled ‘disguised employees’, these contractors fall ‘within IR35’ and are subject to PAYE tax, and the subsequent reduction in their take home pay.
The creation of the Off-Payroll rules has recently expanded IR35 regulation, dictating that it is no longer up to contractors to determine whether they fall into IR35 but rather the companies that employ them. Despite significant negative feedback following the new legislation being introduced into the public sector, HMRC is now extending the rules into the private sector in April 2020.
This has caused even more backlash, with many contractors fearing that companies will simply ‘blanket IR35’ contractor roles. In a recent study conducted by ContractorUK, two thirds (62%) of UK contractors fear blanket IR35 inclusions in contracting job specifications after April 2020 – resulting in significantly higher tax liabilities. This was a major issue in the public sector, with a significant portion of contractors choosing to not go for public sector projects as they were all labelled as being ‘within IR35’. This meant they were classed as fixed permanent employees, but they did not receive the usual benefits associated with permanent employment.
Lorraine Kelly’s win over HMRC will be seen as very welcome news to the UK contracting community. Contractors are crucial for plugging the widening skills gap, fuelling growth in the digital economy and delivering crucial projects. This winning case shows that this is finally being recognised by those who have real decision-making power and that HMRC struggle sto understand its own tax legislation. With private sector IR35 reform due for implementation in 2020, how does HMRC expect wider business to implement IR35 consistently if HMRC continues to lose tribunals? And the HMRC ‘CEST’ tool used to help determine classification has received significant criticism to date.
More must be done to explain what parameters must be met in order to be classed as being “within IR35” regulation. If this is not done, then a significant portion of contractors will be forced to seriously consider their future in the industry. One in five also believe they will be forced to leave contracting for a permanent role post-April 2020 due to the serious impact the new legislation will have on their livelihoods.
Research from ContractorUK has found that the majority (80%)of UK contractors think businesses won’t understand how to implement the new rules effectively in the private sector. The research further found that over half (52%) of UK contractors strongly believe introducing IR35 into the private sector will result in companies being unable to deliver on key projects such as digital transformation or post-Brexit contingency plans.
While this win for Lorraine Kelly will put a smile on many contractors’ faces, the important question still remains – how does HMRC expect UK businesses to correctly and consistently implement IR35 if they continue to lose tribunals?