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IR35 consultation: how many times did HMRC miss the point?

The Government’s much-anticipated consultation on private sector IR35 reform opened last week, and unsurprisingly, the details have done little to win HMRC any support from contractors, or other parties in the supply chain for that matter.

Predictably, the regurgitated line; ‘public sector changes are working’, remains the backbone behind HMRC’s argument to extend reform, as is the Government’s claimed cost of non-compliance, which they estimate at £700m. Although, it remains to be seen as to how accurate this figure is.

At a glance, the document detailed HMRC’s view on public sector reform, explained the actual consultation process, outlined potential challenges of new changes and proposed possible next steps.

But as you might have realised by the overwhelmingly negative reaction to the document, HMRC’s stance remains the same. Still, they will not accept the reality of IR35 reform, nor do they seem to understand the blow further changes could cause UK business.

After reviewing the consultation details, here’s where HMRC have gone wrong:

Public sector changes have improved IR35 compliance.

“Evidence suggests that the public sector reform has been effective in increasing compliance.”

A rising number of contractors working inside IR35 in the public sector does not necessarily mean reform is increasing compliance – even less so when end engagers are making blanket IR35 determinations, or using CEST, which HMRC cannot prove to be accurate.

Public sector bodies make case-by-case IR35 assessments.

“The vast majority of public authorities were reported to be making assessments on a case-by-case basis.”

If this is accurate, then why are thousands of public sector contractors being blanket placed inside IR35? FCSA research recently revealed just 24% of contractors working through agencies were given an individual IR35 assessment, which highlights the public sector’s ongoing problems.

9 in 10 contractors are operating non-compliantly.

“HMRC estimates that only 10% of PSCs that should apply the legislation actually do so.”

Claiming that 90% of contractors who should be working inside IR35 currently operate outside the rules, is a bold and damaging move on HMRC’s part. But Qdos Contractor data does go some way to refuting this. 89% of the IR35 contract reviews carried out by the specialist in the months soon after public sector reform belong – in their opinion – outside the rules. This suggests that 9 in 10 contractors – or at least those assessed by the specialist – are IR35 compliant.

IR35 reform has not and will not impact genuinely self-employed workers.

“It does not affect how people who are genuinely self-employed are taxed.”

If public sector changes are anything to go by, IR35 reform can lead to huge numbers of genuinely self-employed workers being taxed as employees, but without receiving any employment rights.

IR35 changes are reducing the benefits of independent working, and this in itself threatens UK self-employment.

IR35 reform will protect workers in the longer term.

“Removing the incentive for clients to engage workers in this way makes it less financially rewarding to do so and should help protect workers in the longer term.”

Ongoing BBC and NHS IR35 troubles are examples of an engager encouraging or setting certain working practices for benefit of the organisation, not the contractor. That said, in the majority of cases, working arrangements are mutually beneficial, with both parties enjoying the benefits of project-based work.

If the Government wants to stamp out non-compliance and protect workers, handing end engagers the responsibility for setting IR35 status is not the answer. You only have to look at the public sector to see why.

CEST is helpful and accurate.

“HMRC has also worked to ensure that the CEST service is as helpful and accurate as possible.”

IR35 legislation is complex, and HMRC of all organisations should know this – after all, they built, introduced, enforced and are clearly intent on changing its rules. CEST has been thoroughly tested by many IR35 experts, and the resounding opinion is that it is not helpful nor accurate, and subsequently, is not fit for purpose.

IR35 determinations must be based on facts.

“Determining employment status for income tax and NICs purposes depends upon the facts of each engagement.”

In practice, this is how IR35 decisions should be carried out. Unfortunately, in the public sector, status decisions are regularly made in a move to protect the end engager’s financial interests.

It is as much up to HMRC to encourage compliance, as it is for them to understand why public sector engagers are struggling. The consultation document touches on the difficulties engagers continue to have with this relatively new and unwanted IR35 responsibility, but fails to acknowledge HMRC’s own failings around implementation of the rules.

For private sector changes to work, HMRC must carry out a thorough and honest review of its own performance.

More tax revenue equals greater IR35 compliance.

“HMRC estimates that an additional £410 million of income tax and NICs has been remitted from these engagements, since the public sector reform was introduced.”

With all things considered, how much of this extra revenue was earned from contractors correctly working inside IR35? The consultation document estimates 58,000 extra individuals now work under IR35 in the public sector. But CEST is unreliable and it’s no secret that public sector engagers continue to make incorrect status decisions – so how many of these workers have been taxed correctly?

IR35 experts increase non-compliance.

“An entire industry has grown up advising companies on how to draft contracts which create the impression that a job falls outside of the off-payroll working rules. The effect of individual perceptions and marketing of such products ultimately leads to more noncompliance.”

Just two days before the consultation details were published, it was revealed that HMRC lost another IR35 case. The contractor fighting HMRC was represented by Qdos Contractor, a provider of insurance, contract reviews and specialist IR35 advice.

For HMRC to suggest these companies are actually increasing non-compliance in the days after losing a case themselves, is particularly controversial.

The deeper you dig into the consultation document, the clearer it becomes; HMRC do not understand the impact of public sector changes. And this makes for concerning news as they explore the possibility of further reform.

The consultation closes on 10th August, and you can make your voice heard against further IR35 changes here.

By Qdos Contractor

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7 thoughts on “IR35 consultation: how many times did HMRC miss the point?”

  1. Q

    “A discussion document was published at Summer Budget
    2015 to consider reforming the off-payroll working rules
    in response to widespread non-compliance.”

    So what is the QUANTITATIVE measure for the “widespread
    non-compliance” ??

    Another lie like the 66,000 max affected that was claimed
    in the RIA done for the original IR35 ??

  2. Ying Tong

    I’m afraid it’s us, or you, who are being slow to get it. The government’s opening premise is clearly a utopia of employees paying the right amount of tax and that amount is as much as possible. The “facts” are then shaped to support that vision. The government, HMRC, Mr Harra et al will doubtless argue that that they pursue these objectives in an open and consultative form of engagement with the interests of the public and tax payers to the fore. Usually, in isolation, it is very difficult to prove otherwise, particularly when the government defines what is in the public interest. The government and its agencies do after all comprise some very clever people with a lot of publicly funded time available in which to construct elegantly woven narratives. Unusually in this case the charade of consultation runs alongside some very public exposure of government behaviours in the Grenfell inquiry and the Windrush debacle. Considered in the round Minister, it is possible to form the reasonable conclusion that this government, like all governments, has at its core a seam of dishonesty and incompetence which its sophists present as formulated policy. After almost twenty years now of twisting and shaking to the sound of IR35 the government is now considering the detonation of an IED under private industry unsure whether to abandon ship over Brexit anyway. Doubtless the government’s spinners will be able to construct a form of words to demonstrate that this is all consistent with the public interest.

    • The Q

      “I’m afraid it’s us, or you, who are being slow to get it. The
      government’s opening premise is clearly a utopia of
      employees paying the right amount of tax and that
      amount is as much as possible.”

      As my accountant told me :

      The tax man want ALL OF YOU as employees on a payroll,
      without ANY access to beneficial tax structures (such as
      ltd companies) , or advice from those knowledgeable
      about the tax regime (such as accountants) .

  3. Andrew Harrison

    Why do they want Contractors inside IR35 when they have already shafted tax rates and traveling expenses for 1 man Companies?

    • Nev

      How do the new tax rates (low rate and high rate) compare with PAYE tax + NI (the latter being around 22%).

    • Ying Tong

      Governments like governing. Governable people is a big help in this regard. People of substantial means with access to choice in jurisdictions and tax regimes are more tedious to govern than people whose resources can be monthly erased by government legislation. Roman Abramovich is a good case in point. The government would like to inconvenience his investor visa application as a pea shooter response to Russia’s increasingly bold intervention in foreign affairs. So Mr Abramovich hopped aboard his personal Boeing 767, spent a day abroad and is now an Israeli citizen with visa rights to spend six months at a time in the UK. Some inconvenience. Coincidentally his Sunday league football team has just canned a £1b stadium development in London. If everyone was allowed to acquire the resources to provide even a semblance of this sort of choice it would amount to what senior civil servants call a right pain in the arse. Contractors who might easily amass a million or two over a 25 year period could decide they don’t like it here. Too much rain, too much government, not enough trains. I’ll do Portugal instead. Sunnier, a more pragmatic government shall we say, trains run on time. So choice is officially detestable and a punitive taxation regime is an effective way to restrict access to choice. That’s why they don’t give up on it even after twenty years of tying themselves up in their own red tape.

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