Abolish IR35

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This petition is on behalf of hard working Contractors/Freelancers who have enriched British industry. Their flexibility has allowed businesses and industries to Flourish.

These freelancers have always been at the receiving end. Their permanent counterparts have felt freelancers are earning more for same disposable income. Freelancers decided to leave the comforts of their permanent employment while the permanent ones chose to be in a secured job. None has stopped any permanent employee from becoming a freelancer. Then there is the complaint as to why Freelancers take dividends and pay less tax. 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. Directors of big corporations have been receiving dividends from a long time. They will continue to do so. HMRC and the ones asking this question are only troubled when a small freelancer follows the same structure as 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 and VAT 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?

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.

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 huge mess. A number of projects have faced 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. If the government idea is to increase wages along with tax collection then they should clearly reform the self-employed laws so that Freelancers get their day rate without worrying about Employer national insurance and settle their money with their spouses minus their expenses. HMRC must avoid seeing their reforms as success through rose tainted glasses. All independent sources believe that it is a chaos out there.

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. It is quite confusing to understand retrospective taxation. This is especially as HMRC left determination of IR35 status on Freelancers based on their contract and working practices. 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, it is difficult to understand whether the contractor will be paying employer NI from his rate or will HMRC charge this from their previous engagers? HMRC’s reply in most cases is that engagers must pay the National insurance but contractors need to get it from them. However, in retrospective taxation, contractors will have no way to go back and ask engagers to cough up this money. HMRC suggests that contractors must approach employment tribunals if they feel engagers should have paid Employer NI. It is not easy as most engagers chose freelancers on the limited company route thereby removing their liabilities. The result will be that the Freelancer’s will be paying everything from his day rate. This will be outright unfair. It will also be 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 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.

HMRC has not understood IR35 in the last 20 years but expectation is that the contractors should have been clear about it. It now expects businesses to understand the same as well moving forward. Let us understand why permanent employees actually earn more than their freelancer counterparts do.

 Example: - If a contractor has agreed a daily rate of 200 with the engager his gross annual revenue will be 44000. Let us deduct their expenses of £ 2,200. The total tax due on them will be £11,676, their net annual income is £ 27,123, and net monthly income is £ 2,260. To earn the same via permanent employment would require a salary of £35,065.

 The above example shows that even though a contractor is taking all the risks and does not have the employment securities they still have to earn significantly more to match their permanent employee counterpart. In the above example, they have to earn £9000 more. This will also be true if they are able to get a contract, which lasts whole 12 months. Most contracts are of 3 or 6 months. 

 HMRC will end up collecting far less tax if they force IR35. Many freelancers earn better money in contracts and pay higher corporation tax. After public sector reforms, HMRC aims to implement IR35 reforms in private sector. One shudders to imagine the mess it will create. HMRC will be spending years investigating freelancers and probably suffering legal reversals in many instances.

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. 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.

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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