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Contractors urged to take IR35 test to avoid tax confusion

Public sector contractors are being urged to use the new Government IR35 status tool to ensure that they are being taxed appropriately.

Freelance body IPSE has advised all contractors to check their IR35 status in order to resolve confusion over recent public sector rule changes.

New rules mean that it is now the job of the public sector organisation to determine the IR35 status of engagements, rather than the contractor. If the public sector organisation deems the engagement to be inside IR35, they apply taxes to the contractor in the same manner as an employee.

These new rules came into force at the beginning of the financial year, on 6 April. There have already been reports of many contractors - including locum doctors - being placed in the wrong tax bracket.

HMRC‘s online Employment Status Service tool (ESS), introduced last month, was designed to provide clarity around IR35 status for contractors. But according to IPSE, many public sector bodies have been taking a blanket approach and incorrectly deeming many engagements to be inside IR35.

Chris Bryce, IPSE CEO, said: “If public sector organisations were given sufficient time to prepare and followed the guidance laid out by HMRC’s ESS tool, the widespread confusion and uncertainty could, and would, have been eased.

“We urge all contractors in the public sector to complete the test and take the results to their client. This is the only way contractors can get fairness and clarity. HMRC has said it will stand by the results of their ESS tool, and IPSE intends to hold them to this.”

However, an IR35 expert claims that the test itself is not up to the job. Dave Chaplin, CEO and founder of Contractor Calculator, compared more than 550 results that contractors have obtained from HMRC’s ESS tool with his own IR35 testing tool and found major discrepancies.

“HMRC doesn’t appear to be standing by the results of its own tool when assessing its own contractor workforce, despite saying it would,” said Chaplin. “[Our] figures firmly back up what agencies and providers have been telling us for months, that the HMRC tool cannot be trusted.

“The market is in utter chaos, and contractors are unnecessarily abandoning Government projects due to blanket rules that are being put in place because of the confusion created. Public sector bodies are opening themselves to significant litigation risk by putting in blanket policies. They have not taken ‘reasonable care’ as the legislation dictates, and by forcing contractors into false employment, they are opening themselves up to the risk of litigation.”