The First Ir35 Letters Have Been Sent Out To It Contractors

By Author: nitin chauhan
Total Articles: 16
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HMRC and the Government have taken the first steps in their campaign to bring in much more money from contractors with the sending out of the first batch of letters to contractors asking them to sit the IR35 Test and to prove that they are outside IR35.



A Review Panel of IR35 set up by the Government to look at IR35 again, recommended that IR35 should not be abolished, with one of the main reasons being that many contractors would leave their Umbrella Companies and go back into Personal Service Companies which was seen as a bad thing as the Government and HMRC get an average of around £10,000 a year less in tax and National Insurance contributions from contractors in Personal Service Companies compared to those in an Umbrella Company.



Indeed, the Government went further and said in the last Budget that they would ‘strengthen IR35’.



To this end, they set up three new Compliance Teams based in Salford, Croydon and Edinburgh and hired a total of 36 Compliance Officers for the new ...
... teams while they are cutting back Government staff elsewhere. It looks as if the Government see contractors as a means of increasing the tax take and see the IR35 tax as a means of doing so. IR35 was set up in 1999 to catch ‘disguised employees’, i.e. because of the spate of companies laying off employees on a Friday and starting them again in the Monday as contractors doing exactly the same job but providing tax advantages for both the company and the new ‘contractor’.



However, it caught many genuine contractors in its net.



Now it looks as if the Government are going to use this IR35 legislation to increase their tax take by classifying many genuine contractors as ‘disguised employees’ and forcing them to pay more tax. To this end they have, with the help of the Professional Contractors Group, devised a new IR35 Business Entity Test that contractors can take online to see if they are at high, medium or low risk of being caught by IR35.



Although the test is not definitive it appears to place virtually all contractors as being of high risk of being inside IR35. Although HMRC devised the test with the PCG, it was HMRC who devised the scoring system alone which appears to show most contractors to be at high risk.Now, the new Compliance Teams have sent out their first letters to contractors who use Personal Service Companies asking them to sit the test online and also asking them to send evidence to prove that they are at low risk of being caught by IR35.



If they can do that then they will not be investigated for a further 3 years but if they cannot, or they don’t reply (and they have only been given a month to reply), then the next step is likely to be a visit from the Compliance Team. If it is found that the contractor is inside of IR35 then this could result in the contractor having to pay tens of thousands of back tax. The end game here appears to be to scare contractors into getting out of Personal Service Companies and joining Umbrella Companies.



Do the maths.



There are currently 200,000 contractors using the Umbrella Company route and each of them pays £10,000 a year extra to HMRC and the Government. That’s £2bn extra a year that the Government didn’t get prior to 1999 when IR35 came in. According to the PCG there are 1.6m freelancers in the UK, most of whom would fail HMRC’s current IR35 Business entity Tests.That’s a very tempting sector for the Government and it doesn’t need any change in the legislation.Their main aim is not to catch contractors but to get high profile publicity in order to scare tens of thousands of contractors to take the Umbrella Company route rather than the Personal Service Company route.



Gerry McLaughlin is the CEO of UK IT Contractor umbrella company website www.ITContractor.com.