When the Association of Taxation Technicians (https://www.att.org.uk/) voices concerns about a core element of Britain's tax system, you know there's something to worry about. That's what's been happening with IR35, the much-despised and dreaded employment status tax rules that, according to the ATT, might actually see employees losing a proportion of their income.
The latest set of rules come into play from the new tax year, in April 2017, and the problem is a fundamental one. There isn't a clear appeal process in place for people who feel they've been wrongly classified by a public sector organisation as an employee rather than a contractor, something that requires the organisation in question to deduct taxes under IR35 as they would for an ordinary employee.
It's a heavy handed way to go about things, and it has prompted an urgent appeal for government clarity regarding workers contracted to work for a public body via an intermediary. The situation is worrying increasing numbers of public sector bodies and contractors, who find it arbitrary, inaccurate and unfair.
So far there has been almost no debate. There's very little official guidance about how workers who feel they've been mis-classified can make an appeal or even register their opinion. There's also a chronic lack of clarity about contractors' national insurance payments and their eligibility for tax credits, adding insult to injury.
The ATT is concerned that the changes to IR35 will go ahead without these key matters being clarified, putting people in a wholly unacceptable position and setting a 'worrying precedent'. If the changes are also rolled out to the private sector as planned, will there be a better level of clarity? The signs are not looking good so far.
Here's our take on IR35 and what it means to people like you.
What is IR35 and what does it mean for you?
IR35 is designed to combat tax avoidance by people who have set up a limited company via which they provide services. It's very common amongst contractors. You can tell that HMRC doesn't approve thanks to the fact that they call such workers 'disguised employees'. IR35 has been around since 2000 and has always been criticised by tax experts as unfair, unclear, poorly thought through and badly implemented.
The idea was that IR35 would play a positive role in defending workers' rights and protecting tax revenue. But the legislation has never worked properly. And it is horribly complicated, which is why most contractors and other so-called disguised employees leave the whole thing to their accountant!
This way of working comes with extra risks and responsibilities. You don't pay NI and tax in the same way as a regular employee, but you also don't get the benefits most employees enjoy. Your dividend payments – in other words your profits – don't attract National Insurance, fair enough when you don't qualify for things like holiday pay, sick pay or a pension.
If workers are caught out by IR35 they have to pay income tax and National Insurance Contributions in the same way they would if employed the normal way. This can shave as much as 25% off their income, and it already causes unnecessary expense and hardship to genuine small businesses and contractors. The trick is to be prepared, which means knowing for sure what your IR35 status is.
What is your IR35 status?
As someone who isn't employed in the traditional sense, you already know it's a bad idea to fall foul of HMRC. To steer clear of problems you really need yourIR35 status to be confirmed by an expert.
We can help you with that, thanks to our IR35 contract review service. We'll confirm whether your contract leaves you inside or outside IR35. We can also answer all your IR35 questions so you can relax in the certain knowledge you're operating on a safe tax footing. If that sounds good, let us put an end to your IR35 nightmares!