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Looming private sector IR35 reforms prompts calls for gig economy-focused tax system overhaul

The growth of the gig-based economy has exposed weaknesses in the UK tax system – exacerbated by the IR35 reforms – that mean an overhaul is needed, panel claims

The UK tax system is ill-equipped to cope with the country’s shift towards a gig-based economy, as evidenced by the difficulties HM Revenue & Customs (HMRC) and the Treasury have faced with enforcing the IR35 tax avoidance regulations, it is claimed.

The legislation was first introduced in April 2000, and since then people’s expectations about how, where and when they work have changed massively, while the concept of anyone working in the same job their entire life is now viewed as archaic, claimed Andy Chamberlain, deputy director for policy at the Association of Independent Professionals and the Self-Employed (IPSE).

Speaking at a panel debate hosted by employee engagement app provider Perkbox, Chamberlain said evidence of this can be seen in the cultural shift society has seen in recent years towards more people opting to work on a self-employed basis. 

“People want to become self-employed because they get to have control of their working lives, technology has made it more possible, and there has been a cultural shift that is making people more aware they can do different bits and pieces of work,” he said.

“Tax collectors have relied on employers to collect tax for them, hand it over in a nice neat bundle of cash each month, and if they don’t do that that [because people are self-employed] it causes problems for government.”

The revamp of the IR35 tax avoidance regulations is the government’s way of side-stepping such difficulties, but the entire tax system is “creaking” under the pressure of trying to accommodate the growing number of self-employed workers out there, added Chamberlain.

“The whole tax system is really creaking… and we need to have a fundamental review of this, and think about how people are working these days and build a tax system around that,” he added.

And the pressure is only going to increase as more people decide to pursue off-payroll working opportunities, said Sam O’Connor, CEO of Coconut, a fintech firm that offers a tax and accounting current account services aimed at freelancers and the self-employed.  

“Freelancers and contractors tend to become contractors because of the nature of their work. Perhaps it is project-based or because they want a certain amount of freedom [because] there is something about being tied to one job that is not very compelling for them,” he said.

Computer Weekly put Chamberlain’s comments about the UK tax system being out of step with the UK’s increasingly gig-based economy to the Treasury, which responded with the following statement: “We value the contribution of flexible workers to the UK economy. But we also have to ensure fairness between individuals working in a similar way.

“IR35 rules only affect people working like employees and through a company; they do not apply to the self-employed,” the statement added.

Extending the reach of IR35

The aim of the Perkbox panel event was to examine what needs to be done to prepare contractors and the private sector organisations that rely on them for the proposed extension of the IR35 reforms to the private sector in April 2020.

The move will see private sector firms assume responsibility for determining if the contractors they hire should be taxed in the same way as salaried staff (inside IR35) or off-payroll employees (outside IR35).

The reforms were introduced to the public sector in April 2017, and meant contractors who work for NHS trusts, local councils and central government departments, for example, were no longer allowed to self-declare their tax status as part of HMRC’s push to clamp down on tax avoidance.

As previously reported by Computer Weekly, the public sector IR35 roll-out prompted an exodus of IT contractors working in parts of the Ministry of Defence, The Home Office, and even HMRC itself, who objected to their engagements being reclassified as inside IR35.

The main crux of their displeasure at receiving this classification is because inside IR35, contractors have to make PAYE tax and National Insurance contributions as a permanent employee would, but without receiving benefits such as paid holiday or sick leave, for example.

HMRC has tended to defend itself in the past against the criticism it has received over the IR35 reforms by making the point that the changes are simply designed to curtail tax avoidance by contractors and ensure they are paying the correct amount.  

According to government figures, the public sector roll-out of the reforms generated an additional £550m in tax revenue for the Treasury, which also predicted that extending the reforms to the private sector will net it just over £3bn by the 2023-24 financial year.

Read more about IR35

A lot of the rhetoric put out by HMRC about the reforms has focused heavily on the need to curtail contractor tax avoidance, but the IR35 regulations are so complicated and woolly that organisations now tasked with determining how their contractors should be taxed find it a struggle, said Chamberlain.

“If you were cynical, you would say the government has calculated all of this, and think everyone is going to be put inside IR35 because they don’t know what else to do and they don’t want to take the risk of [making the wrong call]. So you are going to end up with more people on the payroll, because that is what they want,” he said.

Particularly, as Paul Jennings, a partner at law firm Bates Wells Braithwaite and fellow panel participant, pointed out, the online check employment status for tax (CEST) tool supplied by HMRC to help organisations make these determinations has had its effectiveness repeatedly called into question since its launch.

“It is produced by HMRC, or in close affiliation with HMRC, and they obviously have a policy of generating as much tax as they can, so that causes some scepticism [about its results], but there are significant gaps in the tool,” he said.

“Everyone in this space considers it to be flawed. You can rely on it [from an HMRC support standpoint], because HMRC will stand by its determination, subject to the caveat that the information you put into it is entirely accurate.

“It requires a lot of development and a lot of work. If you are an organisation, you would be far better off getting the opinion of a specialist employment or tax lawyer or accountant [on IR35] and I think the tool is fallible and quite partial,” he added.

And while it might make life easier for private sector employers to simply rule all their contractors inside IR35 or make them permanent, on-payroll employees in response to the reforms, Jennings said they risk putting themselves at a disadvantage when it comes to attracting talent later down the line if they do.

“The flipside to that is you risk driving away contracting talent who do not want to be engaged with on that basis,” he said.

To this point, Jin Kaur, a Salesforce contractor working at Perkbox, added: “I personally did not become a contractor for tax reasons. My sole purpose and intention was to travel and then work, and have a work-life balance.”

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