Finance Bill debate raises concerns over tax authority’s IR35 calculator

SNP MP questions accuracy of HMRC’s tax status calculator – Photo credit: Fotolia

HMRC’s tool to help contractors calculate their tax status has come under fire from the Scottish National Party, as accountants slam the government for keeping IR35 reforms in the Finance Bill.

The UK’s tax authority is tightening up on the tax legislation known as IR35, as part of reforms that aim to tackle contractors who are not paying the right amount of tax, which it estimates is costing the public purse £440m a year.

As of 6 April, the responsibility for making sure that contractors are paying the right PAYE and national insurance taxes shifted from the contractors to the bodies or agencies that hire them.

Contractors who are now deemed “inside” IR35 could end up paying around 20% more tax each year, which has led some to leave government – a decision that is likely to hit the technology professions – where there is already more competition from the private sector – hardest.

Related content

Contracting site claims half of contractors could be caught inside IR35 as deadline looms
Government faces ‘mass exodus’ of IT contractors as HMRC clamps down on tax rules
Procurement teams ‘need more digital know-how’

In an effort to help both contractors and agencies know where they stand on the legislation, HMRC has released an online tool – the Employment Status Service – that the authority said had been developed using relevant case law.

However, the tool has been widely criticised, with the contracting website ContractorCalculator claiming earlier this month that the tool’s assessments “are worryingly inconsistent”.

The site’s assessment found that 29% of those that pass using HMRC’s tool should fail, and that the tool  “fails to determine the IR35 status of contractors in 14% of clear cut cases”.

“Concerns have been raised with me about the online tool and its shortcomings.”

Kirsty Blackman, MP for Aberdeen North

The issue has now been raised in the House of Commons, during yesterday’s debate of the Finance Bill – which was passed by MPs in a largely truncated form, with 72 of the 135 clauses and 18 of the 29 schedules removed.

Kirsty Blackman, SNP MP for Aberdeen North, said of the tool: “People have told me that no matter what information they have put in, they have always been told that they have to pay more tax than they were expecting.

“Concerns have been raised with me about that online tool and its shortcomings, and about the fact that HMRC is always asking people to pay a level of tax that they think is wrong or too high.”

In response, the financial secretary to the Treasury Jane Ellison said she was “surprised” at the concerns, but asked Blackman to send details of the concerns before parliament is dissolved next week “so that HMRC can look at the factual issues”.

Ellison said: “I am surprised by what she says, but let us ask HMRC to look at the practical issues she raises—while we are off doing other things, it can perhaps look at those if she supplies the information in the next few days.”

She added that HMRC had worked with the Crown Commercial Service to produce guidance for public authorities and has supported them to implement the changes, as well as noting that the tool had been used more than 273,000 times since it went live last month.

HMRC has previously said that the tool “is working correctly and has been extensively tested”, but that it “welcomes feedback from users”.

‘Brexit means government needs contractor resource’

Meanwhile, the Association of Chartered Certified Accountants has said that it is “concerned” that the decision to speed the Finance (No2) Bill through parliament – which the government has had to do to ensure continuity of tax collection – has prevented proper debate on the IR35 rules.

“We are concerned IR35 rules have not been reviewed in detail ahead of the general election,” the group said, adding that this should have taken into account the “current need for contractor resource” in the public sector.

“The implementation of IR35 rules on the taxation of contractors puts additional pressure on the public sector when the government most needs this additional resource to deal with major changes to existing processes, including implementation of digital systems, as well as Brexit,” it said.

The reforms are only being implemented for public sector contractors initially, but sources have told PublicTechnology that it is widely believed this is a “testbed” before the reform is rolled out to the private sector.

ACCA also noted this discrepancy in its statement, saying that the government should have taken into account the need to maintain “an even playing field between public and private sectors”.