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This petition is on behalf of Contractors/Freelancers to abolish IR35 and to stop retrospective taxation based on it. It also wants HMRC to stop bankrupting freelancers who are on loan schemes.
Let us look at some known facts first. Freelancers have no employment guarantee. They are not paid redundancy if they are served a notice period in their contract. Sometimes, clients do not pay these contractors for the work done. They are lucky if they get a 6 months contract. They have to spend money on their trainings, advertisements and time on networking in order to get work. Some lucky contractors have worked for 2-3 years regularly in a contract followed by many months of uncertainty. All of them have seen a period of famine. These contractors do not enjoy any employment benefits when they are in a contract. These include Holidays, Sick leaves, Pension top ups. They have to pay for their own accountants, insurance and expenses. They have taken great risk in leaving comfort of their permanent employment. However, there is either an attitude of disdain or probably misplaced jealousy for freelancers.
The often asked question is why do contractors take away more money in form of dividends and why do they use a limited company structure?
Dividends are taxable and the government is increasing taxes on dividends continuously. This tax is after the freelancers have paid corporation tax through their companies. An article by contractor calculator shows how the new dividend tax has completely finished the difference between earning of contractors and employees.
Directors of big corporations have been receiving dividends from a long time. They will continue to do so. All that a small freelancer does is follow the structure of a limited company.
These contractors used the structure of the limited company because of engagers, as engagers would not accept people with a self-employed status. HMRC and government collected hefty corporation taxes from these contractors for years. It now collects Dividend taxes from contractors as well. This also reflects how we have different set of yardstick for big business and small business. It is ok for big business to do the same work, pay their directors dividends but it is wrong for an individual to operate like a limited company. This is when the freelancer has no other choice but to do so.
These contractors if self-employed would have paid Class 2 NI and settled their income with their spouses. However, the engagers did not let us have the self-employed status. Is it fair of HMRC or the ones troubled to be ok for receiving corporation tax from Freelancer’s for years, accepting their returns and now saying you are disguised employees?
Everyone benefits from this gig-economy. Big Business want flexible workforce for short-term work. A lot of working class wants flexibility away from appraisals and working continuously.
The government with its short-term vision has started to go after the freelancing industry in multiple ways. The aim is to try to get, as many freelancers to give PAYE tax as possible. This is while providing them no relief or employment benefits. To be fair on government they do intend to bring consultations in this regard. However, intention is that they have laid down a fundamentally flawed position and now want to follow it or drum up support for it through media. Previous experience shows that Government always follows a laid position irrespective of consultations.
The public sector reform brought out in 2018 has created a mess. While it is good that the freelancer no longer determines their IR35 status, all corporates try to shrug the responsibility lest they are penalised by HMRC later. Therefore, most contracts are deemed to be under IR35, which has left a big space for legal challenges. As a freelancer, one wonders whether this is plain stupidity or a big cohort between HMRC, solicitors and accountants. HMRC rather than collecting tax will be spending more money in sorting this legal mess. The mess has seen a number of projects face delays, staff shortage and seen key freelancers leave their positions. A number of jobs have offshored, as they required staff urgently. It has hit many essential departments such as NHS and Councils. HMRC and all other public sector bodies had to increase their day rates to hire short-term staff. Why does the government not respect the risk freelancers take? Why do they not accept that contractors only followed rules at the time and finally why can’t they reform the self-employed laws so that Freelancers get their day rate without worrying about retro chase? Looking at a big community as fraudsters and criminals is serving no good to anyone. All that this community has done is to accept risk for that extra reward. HMRC feel they are doing a great job with CEST, IR35 reforms but all that they are doing is creating more work for solicitors, insurance companies and accountants. The freelancers and indeed HMRC are all set to play a loose-loose game.
An article by Julia Kermode lists the impacts of IR35 as a whole.
HMRC has gone ahead and suggested that they will do a retrospective taxation on all contractors who operated through their limited companies if found within IR35. This is something, where HMRC has suffered legal reversal in 80% of cases. HMRC can judge a contract to be under IR35 retrospectively. If the contractor was unfortunate to have accepted it through his limited company, he even has to pay employer NI from his rate, as HMRC does not deem the engagers as employers while deeming the freelancer as employee. This is outright unfair. It is also unfair not to give relief to Freelancer’s for holidays, sick leaves, pension, redundancy and other employment benefits while judging a contract under IR35 retrospectively. The reform of IR35 shows that HMRC also thought it was not fit. Therefore, a forward-looking view is required than a retrospective one.
There is another set of freelancers. These freelancers used services of umbrellas who suggested that they would provide loans to them. These operated under HMRC watch for years and some of them even advertised themselves as HMRC compliant. HMRC after years of lethargy has suddenly asked freelancers to repay all loan charges by 2019. HMRC should take a lenient view for these freelancers. They currently generate tax and HMRC’s action against them will bankrupt them. These freelancers will become economically unviable and left on benefits.
The result of IR35 is slowly becoming visible. Freelancing community is living in fear and businesses are suffering. HMRC also loses cases at various courts on a regular basis. It has tasted success in a few cases. However, the amount, time and money it has burned is more than the revenue it can expect to collect. An uncertain environment is pervading.
In this regard, the petition wants Government to take a transparent approach, which will help government, freelancers, HMRC and businesses. There should be no retrospective IR35 taxation. A clear law moving forward is required. Vague laws like IR35 are an excuse to come back and harass people and businesses for unpaid taxes when in practical they only followed rules provided at the time. The government has not confirmed they will not investigate a contract if classified outside IR35 by the engager under new laws. This law therefore only creates more uncertainty. HMRC’s own CEST tool is giving inaccurate results. It is clear that HMRC does not understand its own law and rightly so as it is very vague. HMRC has not understood IR35 in last 20 years. A correct view is essential. It should allow all freelancers to be either self-employed or remain limited with both routes having clear and common laws irrespective of IR35. The government can look at having all freelancers pay tax through the self-employed route. In this regards, they should reform the self-employed tax laws rather than force a vague IR35 law on everyone. As suggested previously, freelancer’s use of limited company route was because of engagers. Even in the limited company route, government has already put Dividend taxes thereby bringing Contractor earning down. They should therefore respect the risks entrepreneurs take. IR35 essentially is a law that reflects archaic mentality and needs abolished.
Everyone needs to understand the vital skills, flexibility and the spirit of enterprise that freelancers bring. The government will have to encourage the spirit of entrepreneurship in Brexit Britain. Keeping individuals, businesses and recruiters in an uncertain position will only harm economy. These freelancers have always been at the receiving end. Their permanent counterparts or critiques have felt freelancers are earning more for same disposable income and taking dividends rather than salary. A Freelancer decided to leave the comforts of his/her permanent employment, as they wanted flexibility in their work practice. The permanent ones chose to be in a secured job. None has stopped any permanent employee from becoming a freelancer.
The author understand that HMRC may suggest that it has laid down a position. However, this position needs reviewing urgently as it is fundamentally incorrect and will have devastating consequences for freelancers, industry and indeed HMRC themselves.
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