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:
“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.
“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.
“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.
“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.
“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.
“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.
“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?
“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.