Taxation: Have HMRC IR35 reforms created new tax dilemmas in 2021?

• What is IR35, and what challenges is it posing to self-employed contractors?
• HMRC chasing “Match of the Day” presenter Gary Lineker in IR35 dispute
• New IR35 regulations creating dilemmas for contractor parties
• Will remote working overcome IR35 reform challenges?

Before we get into the nitty-gritty of the IR35 reform, it seems best to break down what exactly IR35 is and what new rules the HMRC introduced in April 2021.

IR35, more formally known as off-payroll working rules, is a word used to describe two sets of tax legislations that allow HMRC to identify contractors and businesses to tackle “disguised employment“.

While genuine contractors don’t tend to enjoy typical employee benefits such as holiday and sick pay, those operating through a limited company can enjoy lower taxes and have a higher level of flexibility over their work.

However, some contractors try to take advantage of the tax discount by disguising their actual employment status and working as if they are self-employed when they are employees.

Employers benefit from this as they do not have to pay employers’ National Insurance (NI) contributions or honour typical employee benefits when hiring staff and can claim business costs against tax bills.

In its simplest form, IR35 is tax legislation determining whether a contractor is self-employed or disguising their employment status by supplying services through an intermediary such as an umbrella company. If the contract points towards being:

• “inside IR35”, HMRC acknowledges you as an employee, meaning you will be liable to pay NI contributions and other taxes like ordinary employees
• “outside IR35” suggests that the individual is self-employed, meaning you will benefit from the tax efficiency that self-employment brings (and any associated risks).

To combat tax avoidance, HMRC introduced off-payroll working regulations, albeit this comes with its dilemmas as many find the legislation challenging and highly ambiguous.

Even HMRC appear to struggle with it, evident in its history of fighting appeals and IR35 cases at tribunal.

In 2019, TV personalities Lorraine Kelly and Kaye Williams successfully challenged separate cases against the HMRC, proving they were outside IR35 rules.

However, some people appear to have had less luck as the former footballer and “Match of the Day” presenter, Gary Lineker, is battling a one-year-long IR35 dispute with the HMRC for GBP 5M.

IR35 dispute: HMRC pursuing Gary Lineker for nearly £5m

HMRC is giving chase to sports broadcaster Gary Lineker over a GBP 5M tax bill associated with IR35 legislation.

According to the latest publication of Mr Lineker’s tax tribunal documents, he has been engaged in a dispute with HMRC for over a year on the matter.

The taxman is chasing up GBP 4.9M in NI contributions from the former footballer for work he carried out for BT Sport during the 2015/16 and 2017/18 tax year and with the BBC between the 2013/14 and 2016/17 financial years.

HMRC believe that Gary Lineker disguised his employment status while working for the two companies by channelling his earnings through an intermediary, which he had launched with his former wife almost ten years ago.

Mr Lineker disagrees with the taxman and says his work falls outside of IR35 rules, hence his appeal.

Insurance broker and tax consultancy firm, Qdos, which specialises in IR35 legislation, commented on the situation with Mr Lineker, stating, “it is not the first time the non-ministerial department has targeted the sports broadcaster.

Qdos CEO, Seb Maley, said: “The irony is that the BBC may have told Gary Lineker to work through a limited company. It might not have been his choice, as was the case with several other BBC freelancers who HMRC have pursued in recent years.”

Meanwhile, Dave Chaplin, CEO of ContractorCalculator, stated: “This is just another example of the HMRC attempt to shore up the Treasury’s coffers by seeking out high-profile celebrities.

“The taxman should be thanking Britain’s self-employed for their contributions, rather than victimising them for tax avoidance with this cruel legislation.”

One month into the new off-payroll working rules and a significant lack of clarity and ambiguity over the new regulations remains.

Although HMRC used several mediums to publicise the IR35 tax reform changes, many individuals and businesses are still unaware of the new rules, which came into force on April 6th 2021.

Those exposed to IR35 reforms facing significant dilemmas

New IR35 tax rules have left many contractors wrestling with incorrect Status Determination Statements, evaluating whether there are any merits of continuing with their limited companies and considering what it means to operate through an umbrella company.

Other factors that they now have to contend with include:

• Determining whether a client is categorised as a ‘small firm’
• Reviewing new indemnity clauses set by HMRC to ascertain liability and responsibility
• Identifying if the ‘consultancy’ is in actual fact a ‘consultancy’ or employment firm
• Weighing up whether they would benefit from taking out IR35 insurance
• Ascertaining whether they will be exposed to overseas rules
• Determining whether a Statement of Work contract solves covers all bases of their business operation
• Evaluating the HMRC risk to their businesses adhering to IR35 tax changes

Meanwhile, recruitment agencies must endure a balancing act of keeping their clients and contractors both informed and satisfied while adhering to an abundance of new legislation, including the Criminal Finance Act and MSC rules.

Umbrella companies have also not gone unscathed, with many facing similar dilemmas to recruitment agencies.

Numerous concerns have been raised following the introduction of new off-payroll working rules. Recent bad press on the umbrella structure has also instigated calls from several parties for even more formal regulation of these companies, which could mean further changes.

End-users dealing with contractors are also facing a new world of dilemmas and uncertainty. It’s now been discovered that people they had hired and worked with for years were disguising their employment status but are essential to their businesses profitability.

The new tax reform has negatively impacted all groups in the contractually supply chain. However, that’s not to say that everyone has responded negatively to the recent tax changes, as some contractors and umbrella companies are far from objecting to the prospect of being regulated.

Furthermore, as these parties and HMRC gain a greater understanding of the new rules, and the chaos fades, business activity should boom as there is still significant demand for contractors.

HMRC’s controversial reforms to off-payroll working rules were regarded as the “death knell” for contracting, but we have seen that a month into the changes that this hasn’t been the case.

An increase in remote working is also fuelling demand for contractors and offsetting tax changes.

Will remote working overcome IR35 challenges in 2021 and beyond?

According to the director of a leading recruitment company, Core-Asset Consulting, Mike Stirton, “more contractors are facing lucrative opportunities having chosen to work remotely due to the impact of the COVID-19 pandemic.”

Mr Stirton said Core-Asset Consulting had witnessed the demand for interim workers increase by 57% over the past year as firms emerge from the pandemic and flexible working, boosting competition for freelancers across the UK.

He said that the commotion that had been anticipated when the new IR35 rules came into effect last month was “nothing more than a storm in a teacup.

“When COVID-19 washed up on British shores, UK businesses took an understandably cautious approach, and competition for interim work was fierce, with far more contractors battling for the few jobs available.

“However, with companies now better equipped to prepare for the challenges of, lockdown restrictions and the virus, demand for interim work has soared since last autumn.”

Mr Stirton also said that firms across Britain have found themselves understaffed and behind on key deliverables as we emerge from coronavirus lockdown restrictions. As they lack skilled workers, this has created significant demand for contractors despite increasing rates to accommodate new tax rules.

While the tax changes have only been in effect since April 2021, as remote and flexible working is fast becoming a norm, contractors can take advantage of an abundance of opportunities.

Furthermore, with companies now facing competition on a national scale, many firms can increase their pay rates.