A survey of 12,000 contractors by website ContractorCalculator.co.uk has revealed widespread non-compliance with the IR35 Off-Payroll rules by agencies and end-clients struggling to apply the complex legislation.
The Off-Payroll rules were introduced into the public sector in 2017. They shifted the burden of IR35 status assessment from individual contractors to the end-clients that hire them. They are due to be extended into the public sector on April 6, however the research by the website has uncovered a startling extent of non-compliance with the rules, nearly two years after their introduction.
When a contractor is assessed as “inside IR35” by their client, the contractor becomes liable for income tax and National Insurance on their contract rate. Additionally, the client should be liable to pay employer’s National Insurance on the rate, but over half (fifty-four per cent) of the contractors surveyed reported having had employer’s National Insurance from their own rate unlawfully. Employer’s National Insurance is currently charged at 13.8% over £8,632 per year, with no upper limit.
Contractors are supposed to be provided with a “Status Determination Statement” by the client upon their IR35 status being assessed, regardless of whether they are judged to be inside or outside IR35. However, sixty-two per cent of respondents said that they hadn’t received the document, which is designed to inform the contractor of how the status decision was made. Fifty-eight per cent said they were willing to take their end-client to the Employment Tribunal to contest “inside IR35” decisions.
The survey also revealed the scale of attrition caused by the rules: fifty-one per cent of contractors believed that the firm they were currently working at had suffered at least a fifty per cent leave rate of contractors due to the IR35 reforms, as contractors moved into the private sector, permanent employment or overseas to find work that wasn’t subject to the rules. Twenty-three per cent planned to quit contracting due to IR35, and twenty-one per cent intended to change career.
“With this draconian legislation, government has stripped the contingent workforce of its flexibility and mobility, so much so that more than half of contractors no longer see it as a viable working model,” said ContractorCalculator.co.uk CEO Dave Chaplin. “Much like the public sector rollout, hirers and agencies are months away from implementation with no final legislation published and a feeble amount of HMRC guidance from which to inform decisions.
We are already witnessing the breakdown of engagements as a result of widespread non-compliance that government has shown no interest in rectifying. This flies in the face of HMRC’s rhetoric about ‘fairness in the tax system’. It’s also ironic, given the fallout will significantly impede HMRC’s tax yield.
So-called “blanketing”, where hirers simply classify all contractors as employed without scrutinising individual working practices and contractual terms, was also revealed to be commonplace, with ten per cent of clients engaging in the practice, and twenty-six per cent of firms imposing a blanket ban on limited company contractors, forcing them to work either via the company payroll or an umbrella company and expose all of their rate to PAYE taxation regardless of their IR35 status. Only twenty-seven per cent of the contractors polled had secured an “outside IR35” decision.
“Whether HMRC considers feedback from over 12,000 members of the flexible workforce ‘anecdotal’ remains to be seen,” commented Chaplin. “What we know for certain is that the figures gathered point to non-compliance and confusion on a grand scale. As a direct consequence of HMRC failing to prepare and educate the market, UK Plc is going to suffer considerably.”
The Off-Payroll status dispute process was also called into question. The rules state that the client itself must arbitrate status disputes, which critics have argued represents a significant conflict of interest. Only one per cent of contractors had managed to get their status decision overturned, whilst thirteen per cent disputed their status but the determination was upheld, twenty-two per cent are still awaiting an answer, and twenty-seven per cent were told they were not allowed to dispute their status, in clear contravention of the rules.
5th March 2020.