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The Liberal Democrat Party has won the support of the contractor community with its pledge to scrap the loan charge policy and undertake a review of the IR35 tax avoidance reforms, as detailed in its election manifesto.
The party said it wants to “end retrospective tax changes like the loan charge” and introduce a review of the Conservatives’ plans to extend the IR35 tax avoidance reforms to the private sector, if it succeeds in coming to power after the 12 December General Election.
As previously reported by Computer Weekly, thousands of IT contractors are currently being pursued by HM Revenue & Customs (HMRC) for taxes it claims they own on work carried out up to 20 years ago, under the terms of the loan charge policy.
The targeted individuals are known to have been remunerated for all or some of the work they did during a 20-year period to 5 April 2019 in the form of non-taxable loans, typically issued by offshore employee benefit trusts (EBTs).
HMRC has since decreed that such loans should have been classified as income and taxed accordingly, and is now seeking retrospective tax payments from 50,000 individuals, including a sizeable number of IT contractors who are facing life-changing bills as a result.
The Loan Charge Action Group (LCAG) is campaigning for the policy to be scrapped, and is currently pursuing a judicial review to have it revoked on human rights grounds, given that seven suicides have been linked to its enforcement to date.
LCAG spokesperson and co-founder Steve Packham said the group welcomes the Liberal Democrats’ pledge to end retrospective tax policies such as the loan charge, which he described as unfit for purpose.
“In its present form, the loan charge evidently undermines the rule of law, overrides statutory taxpayer protections, and is being used by HMRC to aggressively target innocent workers who have not broken the law, instead of the employers and agencies it was intended to tackle,” he said. “It is clearly unfit for purpose.”
Seb Maley, CEO of IR35 legal consultancy service provider Qdos, described the Lib Dem manifesto pledges as a “bold but very welcome statement of intent”, while the loan charge aspect of it would bring a huge amount of relief to thousands of people.
“Reversing the devastating loan charge would come as a huge relief to tens of thousands of contractors who are facing massive retrospective tax bills,” he said.
IR35 reforms under review
The Lib Dems’ plans to undertake a review of the IR35 private sector reforms comes at a time of great uncertainty for the contractor community, as many are waiting to see how the organisations they engage with plan to accommodate the change in responsibility that the reforms will bring.
From April 2020, medium to large private sector organisations will be tasked with deciding whether the contractors they engage with should be classified as permanent employees (inside IR35) for the work they do, or as off-payroll employees (outside IR35), and taxed accordingly.
Previously, it was down to contractors to self-declare their tax status, and there are concerns that the administrative burden on private sector firms of making these determinations will see some opt to do away with using contractors altogether, or determine that all the ones they use are working inside IR35.
Dave Chaplin, CEO of tax consultancy ContractorCalculator, said a review of the IR35 regulations is long overdue, given the problems that public sector organisations have already run into since being tasked with determining how the contractors they use should be taxed since April 2017.
“The [IR35] off-payroll rules threaten incontrovertible damage to the private sector, yet the current government seems intent on looking the other way when presented with the fact,” said Chaplin. “A considered review of IR35 and these devastating proposals is just what is needed.
“Firms are incapable of applying the rules consistently across the market, leading to market distortion and a tendency for firms to be more competitive if they are less compliant, leading to a breeding ground for tax avoidance.
“Off-payroll tax in the private sector will force thousands of contractors into false employment, expose self-employed contractors to excessive taxation, drive up project costs significantly, deprive UK industry of essential access to key skills and further incite tax non-compliance and tax evasion.”
Julia Kermode, chief executive of the Freelancer & Contractor Services Association (FCSA) trade body, backed Chaplin’s view that the reforms could have dire consequences for the UK economy, and is heartened to see the Liberal Democrats acknowledge that.
Read more about tech tax issues
- With just over six months to go until the IR35 tax avoidance reforms come into force in the private sector, IT contractors are waiting with bated breath to see how the organisations they engage with intend to respond to their new-found responsibilities.
- Thousands of IT contractors across the UK are living in a state of limbo as they await the outcome of an independent review into a government tax policy that has saddled them with life-changing tax bills relating to work they did up to 20 years ago.
“In the last few years, we have seen many changes to tax legislation and IR35 reform is one change that has not been properly targeted, not been proportional and not been fair for the vast majority of genuine self-employed workers or the businesses that have engaged them,” she said. “This current government is yet to acknowledge that.
“The fall-out could be cataclysmic for the UK economy and the country, which is already facing some serious challenges as we approach the new year. Now is not the time to penalise the UK’s flexible workforce, which this country relies upon to prop up its economy in difficult times.”
At the time of writing, the Liberal Democrats are the only political party to pledge support for revoking the loan charge and addressing the issues contractors are running into with the IR35 reforms, within its election manifesto.
That said, in the run-up to the election, a 200-strong cohort of cross-party MPs threw their weight behind scrapping the loan charge policy by forming the Loan Charge All Party Parliamentary Group (APPG).
According to Qdos’ Maley, given the difficulties so many contractors are currently facing as a result of the loan charge and IR35 policies, the Liberal Democrats’ stance on the matter could secure them a fair few extra votes on election day.
“In recent years, the Conservative Party has introduced a number of short-sighted tax reforms, such as IR35 changes and the loan charge,” he said. “With the General Election only weeks away, this will be in contractors’ minds as they head to the polls.
“That the Liberal Democrats have shown they at least understand the issues most important to contractors is likely to win them the support of independent workers who feel let down by the existing government.”
Taxing times for tech giants
Elsewhere in its manifesto, the Liberal Democrat Party has also vowed to take a tougher stance on “international tech giants” that engage in corporate tax avoidance and evasion by introducing changes to the Digital Sales Tax rules to “ensure the tax giants pay their fair share”.
This policy, introduced by former chancellor Philip Hammond in the 2018 Budget, will introduce a 2% tax on larger, profitable web companies that generate at least £500m a year in global revenue from April 2020. It is expected the move could generate up to £400m for the UK economy.
In a similar vein, the Lib Dem manifesto also indicates that, should the party win the 12 December election, it will throw its weight behind the Organisation for Economic Co-operation and Development’s (OECD) plans to make multinationals pay a level of tax that is more tightly related to the sales they generate in each country in which they operate.
“Businesses and individuals who benefit from being based in the UK should pay their fair share in tax – and responsible businesses are willing to do this,” the Lib Dem manifesto document said. “They benefit from public goods, such as an educated workforce, a stable economy and publicly funded infrastructure, and it is right that they should contribute towards them.”
In its current form, the UK taxation system is “unbalanced and unfair”, the Lib Dem document said, and the big tech firms are reaping the benefits of this. “It is too easy for tech giants and large monopolies to avoid tax and income from employment is taxed more harshly than income generated by wealth,” it added.