New Contractor IR35 Attack by Chancellor

IR35 Tax, IR35 legislation, Inside IR35
IR35 Tax and the Tories

Contractor IR35 Attack


It looks like there will be another contractor IR35 attack by Chancellor Osborne.

The Professional Contractors Group (now IPSE) had such high hopes for the Conservatives when they came to power.

They hoped that they would abolish IR35. The Tories did not disavow them of this dream whilst in opposition but cyncially decided that they would keep IR35 when in government.

Not only that they annouced they would strengthen it.

IR35 Not Working Properly

IR35 Tax, IR35 legislation, Inside IR35
Ir35 Tax and the Tories

It seems that Chancellor Osborne believes that IR35 is not working properly. Only a small percentage of contractors in the UK pay it.

Those who believe that they are outside IR35 use limited companies, or personal service companies, as the Chancellor prefers to call them.

The vast bulk of those who believe they are caught by IR35 operate through onshore umbrella companies.

Onshore Umbrella Company Contractors

Although they pay an average ofÂ  Â£10,000 a year more tax than limited company contractors, on average, they still pay less than those who pay the IR35 PAYE tax. This is because they can claim for some expenses as tax relief such as travel and subsistence.

They can claim for travel to work, which an employee can’t. This is because the contractor’s office is his, or her, home and they are claiming for travel costs from their main office.

They can also claim expenses for staying away from home overnight.

The Chancellor wants to stop this.

Travel and Subsistance Expenses Tax Relief

Although it could be claimed that travel to work tax relief expenses is unfair as employees have to pay their own travel to work costs, if employees had to stay for a period away from home to do work at a client’s site, the expense would be reimbursed by their company.

The same does not apply to contractors.

It used to be assumed that the Chancellor and HMRC liked Onshore Umbrella Companies, that supposed ‘love affair’ has been dashed on the rocks by the Chancellor’s statements in the recent budget.

He wants to take away the travel and subsistence tax relief for umbrella company contractors as well as for personal service company contractors.

HMRC and Onshore Umbrella Companies

It was thought that HMRC liked the fact thatÂ  the onshore umbrella companies sent them huge cheques each month which was a lot better than waiting for the returns of more than 200,000 contractors.

It was thought that HMRC were prepared to put up with the small loss they made in tax from umbrella company contractors claiming tax relief for travel and subsistence because of the money they got each month form the umbrella companies, who did all the work by extracting the tax from contractors’ earnings themselves.

How the umbrella company operators looked down on contractors who operated via offshore umbrella companies.

Disguised Contractors

Indeed, the umbrella company owners almost forgot that the contractors who used them were disguised contractors, i.e. disguised to look like employees of the umbrella companies themselves.

I don’t know any employees of any company who pay their company a monthly fee to operate their payroll, deduct their tax and pay them.

It is, of course, a ruse and tax avoidance, just like the offshore umbrella companies – both being tax avoidance rather than tax evasion.

The Chancellor has seen that and now wants Umbrella Company contractors and Personal Service Company contractors to pay tax as if they were employees – and without tax relief.

He wants them all paying PAYE IR35 tax.

Engagers and New IR35 Test

So, how is he going to do this?

A while back, in conjunction with IPSE (ex-PCG) he came up with an IR35 Test to show whether contractors were inside or outside IR35.

The trouble was that although HMRC and IPSE agreed the rules that showed whether a contractor was inside IR35 or outside IR35, it was HMRC, unilaterally, who decided the weighting factors.

They decided the number of points allocated against each question and which figure that the final total of poinst would be weighed against to show where a contractor was above the IR35 threshold or below it.

It being HMRC, the threshold was very high and it was almost impossible for a normally acting contractor to be outside of IR35.

They did say that this test was advisory but many Governement departments used it as if it was fact.

IR35 Test Simplified

So, how is the Chancellor going to get UK contractors to pay the IR35 tax without any deductions for tax relief?

Firstly, he is going to simplify theIR35Â  test.

Secondly, he is going to change who decides if a contractor is inside or outside of IR35.

At the moment, it is self-deciding.

The contractor decides if he, or she, is inside IR35 or outside IR35. Indeed, they often have their contracts altered to help them be outside IR35.

However, for many of them it is wishful thinking. They are really inside IR35 but operate through a personalservcie company as if they were outside.

IR35 Investigation

HMRC can’t test hundreds of thousands of contractors to see if they are inside or outside so there is saftey for them in numbers like a shoal of fish being attacked by sharks.

Some get picked off, i.e. investigated.

However, that is a length and costly process. Some contractors investigated get away with it and some have to stump up, often after several years fighting it.

Often they have to pay in the tens pf thousands in back tax.

Engagers to Become Enforcers

The Chancellor, though, has a cure for this.

He wants to make it that it is no longer self-policing.

He doesn’t want to take the work on his own department or that of HMRC.

He has decided to pick a soft target – the engager. That’s a term taht you will be hearing more of.

This could be the client or the agency.

There is the threat to them that if they get it wrong they would have to pay the misisng tax themselves.

Engagers, Contractors and the New IR35 Test

He will want them to do the new IR35 test on contractors, themselves, and then, if the contractor is inside IR35, deduct the tax from the contractor’s money and send it to HMRC.

As we saw from the previous IR35 test, it will be virtually impossible for normal contractors to pass this IR35t est and remain outside IR35.

sS, many, many more contractors will have their tax deducted before they receive any money from their ‘engager’. The engagers will be the ‘enforcers’ of IR35 tax in the future – and if they get it wrong they will have to stump up the tax themselves.

So, what do you think they will do? Will they give the contractor the benefit of the doubtÂ  in a close IR35 test?

I don’t think so.

IPSE, IR35 and the Government

After many years of IPSE fighting Governments over IR35 it looks like checkmate to the Chancellor. A Tory Government looks like it will succeed where New Labour failed in getting contractors to stump up for the IR35 tax.

There are, of course, benefits to being a permanent employee – but contractors, who will now be taxed as if they are employees, will get none of those.

They will only be employees for taxation purposes.

Chancellor Osborne’s Family Trust

By the way, Chancellor Osborne has a family offshore trust valued at Â£4.5m. When this was revealed in the press he said that the appropriate UK tax would be paid on the money when it came back onshore.

Of course, the full point of offshore trusts are that the money never comes back onshore and is never taxed. Users of these trurts, which include contractors now, receive loans in lieu of the money sent abroad.

Those loans are never repaid and the loan lapses eventually on the death of the trust user.

So, Chancellor Osborne will neve have to pay any tax on any of his offshore family trust money.

Contractors Using Offshore Umbrella Companies

offshore umbrella companies
Offshore Umbrella Companies

With the Chancellor squeezing contractor more and more, many contractors are now copying the Chancellor and the Tory Grandees and Hedge Fund companies by operating through offshore umbrella companies.

It looks like, with this new contractor IR35 attack, they’ve decide that what is sauce for the goose is sauce for the gander.

See Anti-Contractor Tories Now Worse than New Labour

and IR35 – Taxman Bags Less than a Million Quid Last Year



  1. I am an electrician working in London I am forced by employment agencies to use umbrella companies and pay employers stamp as well as employees stamp plus umbrella companies fee for payroll just to get my wages every weekthis can be between Â£17.50 and Â£30.00 per week.
    In 1 year a may have used 10 different umbrella companies in order to get my wages as employment agencies have their own preferred umbrella company and will not use my selected umbrella company
    Employment agencies should be made to pay direct to the contractor as this is their business and not the contractors.
    it is the large companies that prefer to use employment agencies rather than use direct employment as this is cheaper and hire and fire with no come backs,this is what needs to be stopped.surely the HMRC can see this but are afraid to go up against the large corporations.
    I would be better off on direct paye and so would the HMRC I do not want to work for umbrella companies i am forced too.
    What country in the world does an employee have to pay for his salary?


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