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80% of UK Government IT Projects Suffer Delays Due To Tax Clampdown (theregister.co.uk)
An anonymous reader shares a report: The vast majority of UK government IT projects are suffering delays due to freelancers quitting over the IR35 tax clampdown, according to a survey of contractors. Of 405 IT freelancers surveyed by Contractor Calculator, 79 per cent said the projects they have been working on were delayed as a result of contractors leaving. In April, the government shifted responsibility for compliance with the IR35 legislation from the individual contractor to the public body or recruitment agency. The Treasury says it hopes to raise $240m for 2017/18 by bringing public sector contractors within the scope of the legislation. However, the overall number of freelancers leaving as a result of the changes is lower than previously thought, with 48 per cent jumping ship. In previous surveys more than 80 per cent had threatened to walk once the changes came into force. Half of the contractors who decided to stay managed to find a way of working outside the IR35 changes, with a further 13 per cent working within the scope of IR35 but negotiating a rate increase. The rest seemingly took the changes on the chin.
This isn/t really "misclassified" contractors. This is a case of IT contractors using a tax loophole, the government closing that tax loophole many years ago, then IT contractors trying to weasel out of it illegally. The change happened years ago, and the government has been explicitly telling people for at least seven years not to pull the "IR35-proof contract" bullshit that doesn't work, but plenty still try.
Basically, the issue is this: organisations employ contractors who act like employees, but want to pay tax like corporations. So they set up a one-person business and write contracts that on paper attempt to swerve around the IR35 legislation. But the government has basically said that it doesn't matter what the contract states if neither party actually adhere to it because you're basically just disguising an employee and evading tax.
If you're a software developer doing work for company A, you previously (many years ago) had two options:
1) Be employed directly by company A. Pay income tax plus national insurance (like EI)
2) Start a one-man consulting company C, which has a contract with company A. Take most of your income as dividends, avoiding paying any national insurance. Also deduct expenses like car travel, lunches ("business meetings"), cell phone and monthly plan ("business phone") etc etc. The combination of dividend tax and corporation tax used to be a fair bit lower than income tax as well.
IR35 aims to prevent option 2 and they recently put more effort into enforcing it. As with many tax laws, it is riddled with "grey area" loopholes that many people still manage to exploit.
"IR35-proof contract" bullshit that doesn't work
The government's problem is that the "IR35-proof contract" mostly did work.
IR35 initially caused a great deal of aggravation in the industry, not least because it was like a Sword of Damocles over the head of every legitimate contractor or freelancer who really was conducting their affairs as an independent business would and not just claiming to be a contractor as a tax loophole while still acting as an employee for all other practical purposes.
After an initial period of confusion, a few test cases settled various criteria as clearly distinguishing people who would not be caught by IR35, and almost everyone started structuring their contracts in this way. From that point on, HMRC has won almost no cases, not that it's even bothered to bring that many in recent years, and most accountants working with small businesses are IME not particularly concerned about the risks of IR35 today.
That poor track record of successful enforcement actions continued even after various attempts to introduce new official guidance on what should or shouldn't be covered. Some of the guidance was hilariously ill-judged; for example, IIRC one set of questions would have put one of my companies under IR35 even though it has nothing to do with contract or freelance work of any kind and no-one who could possibly be in the "employer" role.
The trouble, of course, is that all of the above also applied to the cheats who really are disguised employees and really should be caught by IR35. And so the irony of the whole government contractor mess coming up now is that the government already basically gave up on IR35 and just directly shafted all the legitimate contractor-based businesses as well by slapping a huge tax rise on dividends a couple of years ago, and then tightening the noose even further last year. At this point, you'd be mad to operate as a limited company and pay out through dividends just to try to save a small percentage on your taxes anyway; the overheads in admin and professional fees to run a limited company would surely cost you more that any small tax saving would be worth.
And yet since the government don't want to hit main income tax, National Insurance or VAT rates, the small businesses and independent professionals keep getting hit anyway. (Just imagine the reaction if, out of the blue, they increased the basic rate of income tax by 7.5% at the next budget, in addition to pushing up a variety of other tax rates here and there so the overall increase in what you were paying was more like 10%.) Sooner or later, they were bound to find that smart, well-advised professionals of the kind who could actually run successful small businesses in the first place were going to walk away from the kind of bad deal the government apparently thinks everyone should take, and in this case, it appears that the government itself is the one losing out as a result. As someone who's always run businesses according to both the letter and the spirit of the rules and yet been repeatedly screwed over by the government anyway, I don't have an iota of sympathy for them.
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