Member Article

Why Most UK Contractors don’t Trust HMRC’s IR35 Online Calculator

The Intermediaries Legislation (aka IR35) was first mentioned in a 1999 Inland Revenue press release. On 9th March 1999, the Inland Revenue issued a press release (IR 35), which becomes a law via the Finance Act 2000 (Schedule 12).

IR35 at Glance

IR35 is a piece of legislation designed to tackle tax avoidance from ‘disguised employment’. Where self-employed contractors set up limited companies to pay themselves through dividends, which are not subject to National Insurance.

IR35 is an initiative designed to combat tax dodging. More specifically, it was HMRC’s response to a growing number of employees leaving their permanent roles, setting up their own businesses and then returning to perform their old role as a contractor. Thus, to avoid Tax Payment and National Insurance at higher rates.

The IR35 calculator was specifically designed to support the numerous contractors, agencies working in recruitment, and other specific professionals, working in the awareness of IR35 for a clear purpose-

• The first is a ‘Path of Education’ for those who do not understand what IR35 is? a. How IR35 came about or its significant impact on UK Contracting.

b. IR35 is not just an issue for contractors; it affects everyone, employers, employees, recruitment agencies, accountants, freelancers, payroll providers and the wider UK economy as a whole.

• Secondly, the IR35 Calculator provides a payroll calculator for quick calculations and illustrations of take home pay under each potential variant of IR35.

What is IR35 Online Calculator – The IR35 online calculator is a tool which facilitates one to identify his tax status directly. It is a direct assessment source helping any professional to calculate whether he/she fall inside or outside IR35.

This website tries to make the tax payment easier, time accumulator and also ensures a future generated profit to the professional.

IR35 Online Calculator - A Squabbled Tool for UK Contractors

IR35 was introduced to identify ‘disguised employees’ and ensure they pay the correct amount of tax. But the legislation is highly complex and HMRC often attempts to categorize contractors within its boundaries. The vast majority of contractors do not trust the results of HMRC’s online assessment tool determining them inside the IR35 changes.

Further, it was also distrusted by the contractors because of its uncertain features and results. A survey, also found that 85% of the contractors do not trust The HMRC’s IR35 Online Calculator.

**1. Fuzzy Conceptualization – ** The IR35 has fuzzy definitions, which created havoc among the contractors to understand.

IR35 is intended to tackle tax avoidance by ‘disguised employees’, but the legislation is highly complex and contractors risk being incorrectly classified. It has changed many times in concepts, since it has introduced.

This tool has not provided a definitive baseline and a specific guideline too, thus not convincing. As it was kept on tweaking, this constantly moved the bars.

Also, this tool though provided an indication, yet it doesn’t take into consideration the unique circumstances of each contract.

2. Uncertain Impact on Public Sector Projects - The tool’s uncertainty, upshots wide ranged public sector ongoing projects.

Contractors are forced to get in shade of blanket rules by the organizations to eliminate perceived tax risks.

In queue with, contractors undertaking very similar projects are being given completely different results, thus not trustworthy.

This made the contractors to refuse to be a part of this deceitful employment.

This results a high proportion of contractors just don’t trust the tool used by many public sector clients and agencies to determine their IR35 status.

Many of the contractors said that the tool tweaked too often and is constantly moves the goalposts.

3. Inaccuracy and Ineffectiveness - Though HMRC kept on making amendments and changes in the tool, yet IR35 effectiveness and accuracy cannot be trusted by the contractors.

The questionnaire comprised in the tool for the assessment of the contractor, whether to be inside or outside IR35, was not accurate in all cases.

Also, the rules and regulation applied by HMRC were not equally implantable to employed and self- employed professionals.

Contractors who are undertaking very similar projects are being given completely different results, along with some comprehensive decisions to the entire workforce.

Due to the same tax laws implications, most of the contractors feel a flaw in the computation of tax and so in the submission of online tax return.

HMRC has not intended to amend the software. Hence, it again becomes unreasonable to accept as a reliable mode of online tax payment by the contractors.

**4. Uncertainty for Private Sector Professionals - ** In the private sector, self-employed professionals are themselves decide whether to apply IR35 or not with the employer. This is again a deficit in the tool, as it fails to get in all employees inside the fence.

Also, there are many more factors responsible to fetch all the private functioning employees (Freelancers, Self-employed Contractors/ Consultants) who are truly responsible for the tax payment.

**5. Introduction of New Supportive Tools - ** HMRC have also introduced an Employment Status Service (ESS) tool (it is to be noticed that there is some controversy adjoining the inadequacies of this tool), which classify one’s profession as an employed or self- employed for the tax reasons.

This tool was in support to make the IR35 calculator more significant, valued and accurate.

Further, this tool has no legal authority and also was inadequate in the categorization and hence was not fit for the purpose. On comparing the results that contractors have received when using the ESS with the results they received when using the tool are:

i. HMRC appears to be giving 25% of contractors an Unknown result. ii. Majorly the Unknown should be cleared in assessment. iii. 30% of appeared, got the clearance from the ESS when they should fail IR35.(assessment based)

In the same way, HMRC has no legal authority to stand by the outcome given by the ESS. The only way 100% certainty is provided is in court, and until a judgment is given, everything is hypothetical.

Hence, HMRC has inadvertently acknowledged that the ESS isn’t ready by admitting that it is still developing the tool.

This created a huge ominous on the reliability and use of IR35.

6. Criticized by Working Bodies – IR35 got argumentative reactions on the functioning and reliability of the tool. These statements have majorly created a disguise on the accuracy of the tool among the contractors.

Lacking in accuracy and failure in amendment made this tool a big target of criticism by many working bodies:

• As IR35 issued different results for the same level employees, it created a huge diversity in among them. Also, this affected the gross benefit for the employees and the companies as well at a enormous level.

• Many small companies or lesser payee freelancers (or Contractors) also duck this tool in tax submission because of its complexity and flawed questionnaire.

• The uncertainty in the exact tax calculation also made many contactors to avoid this online tool. Also, this made an ambiguity in the assurance of the justified amount paid. It created a foggy impact too in receiving any future benefit.

• Many professionals adopted several other Tax Saving Plans to secure their income, HMRC lead to great loss in revenue generating.

• This tool proved inadequate to create a justified tax framing for all kind of professionals (Employed in Public Sectors, Private Sectors, Freelancers, Self- employed professionals).

• This online calculating tool does not prove a profit generating application for the department.

**7. Anticipating for the Final & Improvised Tool – ** Contractors are still waiting for a well-structured, completely secured and accurate online tool. In spite of taken several actions and applied charges on the governing body, yet the requirement is to be full filled.

As after, several amendments, trapping the guilt ones, HMRC also lost the trust on IR35 online tool, as a contractor beat HMRC in IR35 case, viz., Larkstar Data. (This was in favour in HMRC again in the High Court in 2009)

Many, further contrary statements and actions have been taken places, which are the results of distrust and non-reliability on the IR35 tool.

Hence, it is clear that in the Contracting world IR35 is talked about in panic- stricken voices, as it is taking a major reason of the end of the contracting work field. Yet, it can be taken as a revolutionary process, which step up to impact the independent

This was posted in Bdaily's Members' News section by Vidit Agarwal .