Dave Chaplin: ‘IR35 is a growth issue for the Tories’

As the Spring Budget approaches, dissenters of the UK government’s increasingly complex contractor legislation are baying for change.

HMRC has already signalled its intent with recent updates to its official umbrella company and deemed employer guidance, but for Dave Chaplin, CEO of IR35 Shield and Contractor Calculator, more radical action is needed.

Chaplin, a prominent IR35 critic, recently reiterated his disapproval of the regime via a new Contractor Calculator campaign calling for the government to either “fix or ditch” the legislation.

Talking to Accountancy Age, Chaplin outlines what the campaign describes as the three “major flaws” in the UK’s off-payroll legislation, and why they are causing “severe harm” to UK productivity and growth.

Double taxation

Due to what Chaplin calls a “longstanding flaw” in the off-payroll legislation, it is possible for HMRC to collect tax twice on the same money. This, he says, is the “primary issue” facing the contracting industry today.

For instance, if an end client determines that a contractor is operating outside IR35, and HMRC decides to intervene, the company will have to pay all the income tax and two sets of National Insurance contributions.

However, the company cannot offset the tax that the contractor has already paid. According to Chaplin, this will typically be around 75% of the bill.

The need to address the flaw was first raised in a Public Accounts Committee report in May 2022. In a December 2022 response, The Treasury said it would ensure that “HMRC does not end up taxing the same income twice”.

But a timescale wasn’t specified, and according to Chaplin, Parliament must act now to implement a tax offsets mechanism and avoid deterring businesses from engaging temporary workers.

“The behavioural effect of having this flaw is that firms are scared to hire people on a self-employed basis, so they either don’t hire or push the work offshore.

“We need that flexibility in the workforce, but at the moment we have this legislative sludge that needs to be removed. They need to introduce a statutory instrument so that this issue is resolved.”

Tax injustice for recruiters

The campaign’s second pillar concerns recruitment agencies and the potential for them to receive “another firm’s crippling tax bill”.

According to Chaplin, this issue stems from the legislative changes rolled out to the private sector in April 2021, which saw end clients,rather than contractors, become responsible for determining the IR35 status of a temporary worker.

Alongside this came the introduction of status determination statements (SDS), designed to be filled out by the end client with “reasonable care”.

The purpose of the document was that, if the determination was inside IR35, it makes the recruitment agency liable for the tax. An “entirely fair” provision designed to “prevent moral hazard”, Chaplin says.

But this movement of tax risk also occurs if the determination is outside IR35. This means that, if HMRC intervenes and the determination is wrong, the agency is still liable for the tax bill.

“This is absurd,” Chaplin argues. “A fundamental tenet of tax law is that the person who makes the decision is the one that gets it in the neck.

“They don’t, and neither should they need to understand all of this complex tax law. They’re basically like a dating agency – they’re middlemen.”

Again, Chaplin makes the case for a “simple fix”, arguing that a minor amendment to the existing legislation via the Finance Act would resolve the issue.

“None of us have ever understood why HMRC have done it that way. I think it’s just a flaw in the drafting, because it makes no sense at all.”

Toothless appeals

Finally, Chaplin laments the regime’s lack of appeal infrastructure for IR35 status determinations, arguing that contractors “are not getting treated fairly”.

He explains that firms considering a self-employed person’s tax status are neither required to provide detail in the SDS, nor is there an independent appeal route for the taxpayer.

In place of this, the legislation includes a client-led dispute process. According to Chaplin, this amounts to “asking end clients to mark their own homework”.

“Asking clients who have got a potential tax bill four times more than it should be to change their mind when they’ve already evaluated the risk and have a process in place – you’re always going to end up with the same answer, so that’s not fair.”

Chaplin goes on to argue that a “simple amendment” could require firms to provide all the information about the working arrangements used in the determination.

He also says that, while an “extremely big ask”, HMRC should establish an independent body specifically to deal with appeals.

“It might be extremely expensive to introduce, and it might even be something that’s not possible given the subjectivity around some of the status determinations – but that’s the only way it could be fair.”

The future of IR35

Overall, Chaplin argues that the Spring Budget is a clear opportunity for the government to address the flaws in the IR35 regime.

He acknowledges that, while a full repeal of the 2017 and 2021 off-payroll rules (called for by Sir John Redwood MP in a recent Sky News interview) is unlikely, concrete steps can still be taken to inject greater fairness into the system.

More: IR35 has been ‘damaging’ to the self-employed says Sir John Redwood

“I would like to see them committing to resolving the double taxation and tax injustice issues in the next finance bill. And because they’re so simple, it’s not an unreasonable ask.”

This, he argues, will be a critical step in beginning to regain the trust of the self-employed, after years of “paying lip service to the issue”.

“They need to be very careful not to fall into the trap of promising something that doesn’t turn out to have any real teeth, because they’ve done that before and the self-employed will feel betrayed again.”

Chaplin also stresses the urgency and widespread impact of the flaws in contracting legislation. The government must view this through the lens of the economy at large, and not as something which solely affects contractors, he says.

“We can’t hang around for this. This isn’t just about contractors – the double taxation issue is massive because it’s affecting all the firms who need to get access to on demand talent. This is a growth issue for the Conservatives.”