Has the government shot itself in the foot? Are we seeing another ill thought out government policy decision? Don’t worry, I’m not going to get all political here but I will leave you to make up your own mind.
The recent announcement of a refocusing of the MTD project (Making Tax Digital) and the reasons given points to underlying issues, which are of the governments own making. The reason? IT contractors are leaving public bodies such as HMRC and the NHS and so any big IT projects such as MTD, are under threat.
Why are they leaving?
There have been no major changes to the tax laws. Let me explain.
The IR35 rules were brought in many years ago to counter the growing trend for workers to be treated as self-employed or to work through their own one man companies. In earlier years they would have been put on the payroll. However, the worker had to decide if they were caught by IR35 (and therefore pay more tax) or not. Guess what most people did. It was a pretty unworkable piece of legislation and most employers and workers largely ignored it.
From 6 April the government has made it the responsibility of public sector bodies to assess whether contractors are caught by the IR35 legislation. Most have taken the safe route rather than asses each case on its merits and applied a blanket policy of applying IR35 to all their contractors.
As a result, contractors working for public sector bodies have seen their earnings reduce by as much as 30%. The outcome? Most of them are heading for contracts in the private sector and leaving HMRC, NHS and others high and dry.
How is this affecting HMRC? Back in March, it was reported that the IT contractors who built the HMRC Employment Status Service Tool, have themselves been ruled within the scope of IR35 and will be treated as employed and pay more taxes.
According to sources, the IT software consultancy responsible for building HMRC’s Employment Status Service Tool had a total of 250 contractors within the department and all of those freelancers are likely to move on, including the team that built the IR35 tool.
So what did HMRC have to say?
“These reforms are about promoting fairness in the tax system and we are clear that everyone should pay their share. HMRC rightly holds everyone who works for it to this standard. Customers who use our online services should not be affected by these reforms.”
Dave Chaplin, chief exec of ContractorCalculator, said that many public sector firms have discovered that blanket rules applied by HMRC and the NHS have had a hugely negative impact. Highly skilled contractors have been leaving the public sector in droves.
So, what do you make of it? None of these contractors have been evading tax but this shift in policy will not only affect the contractors but ultimately all of us as costs in the public sector must inevitably rise.
The future of MTD
What has all this got to do with MTD – Making Tax Digital. The drain in skilled IT manpower must have left the project severely under resourced. They are probably unable to meet the previously well-publicised deadlines. So we have changes to MTD. The timetables have been put back. Some taxpayers no longer required to comply with the requirement for digital record keeping and quarterly reporting.
What are we being told?
The new financial secretary to the Treasury, Paymaster General Stride has “listened to concerns raised by parliamentarians, in particular, the Treasury Select Committee, businesses and professional bodies about the pace of change”.
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