Is HMRC promoting tax avoidance for contractors who use its IR35 status tool?

Contracting expert suggests HMRC is promoting tax avoidance as 29 per cent of contractors should fail the IR35 test.

Three per cent of contractors who HMRC fails should actually pass, highlighting a need to investigate tax avoidance

Three per cent of contractors who HMRC fails should actually pass

In the week that new IR35 legislation comes into effect in the public sector, contracting expert Dave Chaplin, CEO and founder of ContractorCalculator suggests that HMRC’s IR35 status tool could be facilitating tax avoidance. This is based on the analysis of over 558 results that contractors have obtained from HMRC’s Employment Status Service tool compared with ContractorCalculator’s IR35Testing tool.

ContractorCalculator’s tool asks 101 questions before giving an instant IR35 review result and also asks that if the contractor used HMRC’s ESS tool, what did it tell them?

Contractor Calculator has answers from 558 contractors and has compared the results and discovered some surprising and worrying conclusions:

A third (39 per cent) of contractors are told by HMRC that they pass IR35, when the IR35Testing tool fails them. The majority of these (19 per cent) are also really strong fails.

A quarter (24 per cent) of contractors are told by HMRC that their status is unknown. Of those unknowns we agree with four per cent of the results. But 60 per cent of that group are clear cut passes or clear fails and should be easily identifiable.

Three per cent of contractors who HMRC fails should actually pass.

ContractorCalculator has been testing contractors with its new version of the testing tool since February seventh and has carried out some 6,049 tests. It has been in development for seven years, is an artificial intelligence based system and produces the same results as all 21 IR35 historic court cases.

Dave Chaplin comments, ‘Given these hard statistics it is no surprise that HMRC doesn’t appear to be standing by the results of its own tool when assessing its own contractor workforce, despite saying it would. These figures firmly back up what agencies and providers have been telling us for months, that the HMRC tool cannot be trusted. A third (29 per cent) of contractors should be caught by IR35 and HMRC has passed them, therefore inadvertently facilitating tax avoidance.

‘The market is in utter chaos, and contractors are unnecessarily abandoning government projects due to blanket rules that are being put in place because of the confusion created. The NHS is also suffering with the BBC recently reporting that some hospitals around the country fear locums will refuse work and not turn up for shifts because of a drop in pay of up to 25 per cent when tax and national insurance is deducted at source under the new reforms.’

Chaplin concludes, ‘Public sector bodies are opening themselves to significant litigation risk by putting in blanket policies. They have not taken ‘reasonable care’ as the legislation dictates, and by forcing contractors into false employment they are opening themselves up to the risk of litigation.

‘And the frustrating thing is – all this could have been avoided if HMRC had actually listened to stakeholders.’

Further reading on tax avoidance

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