Since 1999, HMRC have been fighting an increasingly difficult battle against contractors and the way in which they are employed. The argument concerns directors who take on contracts through their limited company rather than as an employee. Directors would have clients pay the fees for the contract into the Limited Company; they would then take a low salary (to dodge NICs and tax) and top up on dividends meaning they pay significantly less tax than full time, permanent employees.
To tackle this problem, HMRC created IR35 – a set of legislation forcing those taking advantage of the loopholes to pay the same taxes as full-time employees. Sounds fair right? Hold on; it’s not quite as simple as that.
The IR35 rules are extremely complicated and difficult to understand; there is no checklist or test to confirm whether you are inside or outside of IR35. Basically, you could be going about your contracts happily only to get a letter from the tax man marking you for IR35 investigation.
With the murky guidelines surrounding IR35, in 2017 HMRC launched a new digital service to help contractors determine their employment status. Despite the apparent help that this tool would provide, it only made matters more confusing. This is because you can complete the CEST assessment and it can still produce an incorrect employment status decision or not even give you an answer at all.
That brings us to the shocking new statistic surrounding the success of the service: 21% of employees were given the result ‘unable to determine.’ This means that an appalling one fifth of those who take the test receive no result and guidance. This translated to 210,000 workers without any guidance on their IR35 status between November 2019 and May 2021. That is 210,000 left confused and at risk of an investigation through no fault of their own.
Experts are describing the staggering statistic as the ‘final nail in the coffin’ for HMRC’s use of this confusing tool. They emphasise that the tool ‘cannot be relied upon’ and is ‘not fit for purpose.’
Need any help with IR35 or a tax investigation? Get in touch with us today, YouKnowItMakesSense!