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COVID-19 and the taxman

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by Paul Ford

One victim of the current Coronavirus that few will mourn is the implementation of the reforms to IR35, the effective application of tax and National Insurance Contributions to the income of a vast number of self-employed contractors. The change shifted the responsibility for making the assessment as to whether the contractor should be paying tax or not from the contractor themselves to the organisation paying for their services. Unpopular with contractors for adversely impacting on their income and unpopular with the end users for giving them bureaucracy they didn’t want and increased costs they didn’t need; this breathing space will be a welcome respite. Except of course for HMRC, who are convinced that there’s a significant number of people out there who aren’t paying their fair share of tax and social security. According to a joint HMRC / Treasury consultation document, non-compliance in the private sector cost them £700 million in the tax year 2017/2018 and will rise to a staggering £1.2 billion by 2022/2023.

And for that reason, if no other, it’s only a postponement. Come 6 April 2021, barring another civilisation-halting event, it’s game on for IR35.

By the time the Government announced the postponement, many end users had adopted and actioned a policy regarding the legislation. Assessments will have been made, processes followed. Contractors will have been shifted to new working arrangements and agencies instructed to supply them on a different basis. Now what do they do? Do they retrace their steps, go back to the way things were originally? Stay with the programme, become early adopters, knowing that the changes are coming anyway? For some, whose contracts have already been terminated, going back might not be an option.

For many, the change will have little impact. If you claimed to be outside IR35 and your assessment confirmed that, then all’s well. If you were already paying PAYE and NIC on all earnings, then nothing changes. However, if you’ve claimed to be outside IR35 and the end user conducting the assessment has determined that you are inside, then you may have problems. Especially if the end user has used HMRC’s own CEST tool to come to that decision. HMRC will almost certainly investigate. We’re all going to be paying a higher level of tax to cover the costs of the current situation and if someone is effectively flagged as avoiding tax, that’s not going to go well.

So IR35 might be temporarily forgotten in the rush to understand the Job Retention Scheme and Statutory Self Employment Pay, but that’s not all that’s on the horizon.

In trying to create what became Statutory Self Employment Pay, Rishi Sunak underlined something that those of us in this industry have known for a long time – that self-employment taxation is fiendishly complex.  It’s been added to and extended and tweaked for years without anyone starting with a blank screen and asking what the tax system should look like if they were going to start now.

Because the answer is, if they had, it wouldn’t look like what we’ve got.

Now in some ways, that’s not entirely surprising.  PAYE only got off the ground as a concept in the extreme circumstances of WW2.  It took a huge drain on the public purse for the Government of the day to look at their systems and find them wanting.

And so it is now.  In the exceptional circumstances of Covid-19, the Government needed to find a way of providing support to different kinds of worker and found that what was theoretically quite easy, was practically, very difficult.

So as well as IR35, which I think we can safely assume will hove reliably into view on 6 April 2021, keep your eyes peeled for an overhaul of self-employed taxation and an increase in income taxation across the board – without question, both are coming.