Flawed IR35 Conceptions: Why HMRC is a Threat to Contractors

Last Updated: 13-01-2021

Reading Time: 3 minutes

So, any delay/postponement of rolling out of Private Sector IR35 didn’t transpire in last week’s budget. After HMRC‘s hat-tip review in February, it’s hardly a surprise.

In a budget that contained so many ‘giveaways’, the Chancellor had to claw back tax from somewhere. Trimming Entrepreneur Relief was one method; forging ahead with IR35 another. The latter may yet come back to bite him (or whichever Chancellor resides at Number 11) in the near future.

Fundamental misconception of what a contractor is

In anticipation of new rules coming to fruition, FT Adviser posted their overview on Tuesday. Entitled, “How the new IR35 rules will work”, the February 2020 Govt report confirming HMRC intentions provides the source material.

Slap, bang in the middle Page 1 of the FT Adviser’s 4-page article is this quote, paraphrased from that Government report:

The rules address the unfairness between individuals working the same way and earning the same but paying different amounts of tax

Therein lies the Government’s case’s flaw. Contractors may perform the same task as a permanent employee, but they do not “[work] the same way”.

How do permies and contractors differ? Let me count the ways.

A more apt question to determine employment status might be:
Does the employer guarantee a contract extension once the current contract expires?

That should be the only question that matters when drawing comparisons. Failing a resounding ‘yes’, then the contractor in question cannot be deemed an employee.

More accessible finance for the self-employed; how’s that work, then?

The budget adds that it will announce ways for self-employed people to more easily access finance (1.57, Support for the Self-Employed). That covers both Start-up finance and easing access onto the property ladder for self-employed people.

That’s fine in theory. But when it comes down to it, it’s the lender who’ll determine risk based on their perception thereof. To suggest otherwise challenges existing FCA guidelines (unless they will now change).

Undermining earning capacity (as the new IR35 rules will) makes the ‘support’ statement paradoxical. It’s as if the government is saying,
“Yes, we’ll help you borrow. But the amount you ‘take home’ to determine how much you can borrow will shrink if you’re ‘inside IR35’.”

The impotence of a neutered workforce

Employment continuity is one of the main reasons independent contractors trigger ‘risk’ when approaching mortgage lenders. Their base (and often outdated) calculations cater for permanent employment, not temporary contracting.

people playing cards in casino
In short, this is where both lenders and the Government show their naivety of the contract industry. Lenders are improving, with more and more lending to contractors (many through intermediaries).

But the Government and HMRC? They can’t grasp the fundamentals of how or why contractors work as they do. Nor, even more frustratingly, why they need to operate as a flexible B2B entity.

I don’t think the longevity of contracts that end clients issue will change after April 6th. But, with clients now deciding status, contracts may become even shorter than they are now. That could throw contractors’ finance into turmoil.

The Government has handed the Private Sector all the cards. What kind of hand do you think they’ll deal the UK’s disposable staff?

Biting the hand that feeds them

Anticipation of the IR35 new rules has already decimated the contractor talent pool. Those rules’ implementation may yet force many more contractors to return to full time employment*.

The Government doesn’t realise it’s killing the flexible workforce it’s relying upon for growth. This is especially true in IT sectors, where planned investment is huge (based on the budget). Lest we forget, we need the Oil & Gas sector, now that we’re on our own as a nation.

And here’s the real kicker. Thousands of small businesses are having to make staff redundant because of coronavirus chaos. When that chaos is over, the economy will need all the help it can get.

Contractors who currently give SMEs the flexibility they need to compete could help that recovery. But if the Government doesn’t reconsider IR35, it may find it’s not got a pot to pi…ck from.

*Don’t forget to finalise your tax liabilities and potential pension contributions if/before you shut up shop. Freelancer Financials has posted an overview of pension options for all contractors. All contractors should act now before fiscal year-end to redeem the tax benefits to which they’re entitled!

Author: John Yerou

John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.

Posted by John Yerou

on March 17th, 2020 21:25pm in John’s Blog.

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