Figures taken from examples provided by HMRC revealed that when it comes to any perceived shortfall in tax resulting from IR35, the hiring organization is responsible 84% of the time while the contractor is responsible only 16% of the time.
This might come as a surprise to anyone who has been listening to what HMRC has said about IR35 and the new off-payroll tax aimed at tackling tax avoidance among contractors. However, the news is less shocking to contractors themselves, as since the April 2016 changes to dividend taxation came into effect, they have been paying a level of tax similar to that of employees.
Hirers are responsible for the largest percentage of the tax shortfall because they do not pay employers’ National Insurance Contributions for contractors, which they would have to do if the worker was an employee.
For a contractor working outside IR35, the amount of tax that they pay in the public sector is already close to that of an employee. However, if the contractor is working within IR35, then employers’ National Insurance deducts from his or her earnings, which results in the contractor paying more tax than an employee but receiving none of the same employment rights.
Despite this, HMRC still considers the contractor working outside IR35 to be responsible for the shortfall in tax.
Employers are supposed to pay National Insurance Contributions on top of the income that they pay to contractors who are within IR35, but in practice, it is the contractor who ends up paying. This means that HMRC loses out on the amount of tax paid.