In its response to the House of Lords Select Committee on PSCs’ recommendation that HMRC should improve its Contract Review Service (CRS) so as to encourage more people to use it, the Government has agreed to carry out a review. The review will be part of a joint initiative with the IR35 Forum to look at how the new improved IR35 administration, which has now been in place for just over 2 years, has worked and what further improvements can be made.
The review will consider the use of the CRS and its barriers to its use and will make recommendations to the IR35 Forum sometime this year. HMRC should not even need to carry out a review to establish why CRS is so seldom used, it’s obvious. Contractors simply do not trust it and they have good reason for their misgivings.
Despite the repeated claims by the Revenue that the CRS operates independently of the IR35 compliance teams, who is actually buying that? Contractors are told they have nothing to fear in using the service and that even if their contract is deemed to fall within the IR35 legislation by the CRS team, they will not share this information with their counterparts. The results are stored away in a locked dark cupboard marked ‘For CRS eyes only’! Call me cynical if you like but I, for one, cannot accept that assertion.
As a general rule, those in the tax and accountancy profession, and a number of other sectors, are duty bound under the Money Laundering Regulations to report any known tax avoidance that a client refuses to voluntary declare to HMRC. Now I would have thought that similar internal reporting requirements exist within HMRC and, if this is the case, then the CRS would be guilty of a dereliction of duty if they did not disclose details of a review that they were convinced was caught by IR35 and by default constituted ‘tax avoidance’.
Even it were true that the CRS team were this type of principality existing in the kingdom of HMRC, any Freelancer opting to take up this free-to-use service should be prepared to allow the Revenue to enter into dialogue with the end client, under the pretext that such communication is necessary to enable CRS to provide an accurate IR35 opinion. Is it really worth a contractor risking tainting their relationship by inviting HMRC to disturb the equilibrium? Surely not, especially where there are a number of IR35 specialists who, for a reasonable fee, will provide a completely independent and confidential assessment.
In response to another of the Lords Select Committee’s recommendations, the IR35 guidance will get another overhaul with the new version to be published shortly. At the same time the Revenue and the IR35 Forum are getting their heads together to gauge the use and impact of the Business Entity Tests, which will be followed by a report and recommendations later in the year.
The IR35 Forum’s membership will itself come under scrutiny from HMRC and not before time. Whilst this collective serves a useful purpose one cannot help feeling that there is an imbalance in its affiliation.
With over 40 personnel spread over 4 specialist IR35 teams, this has enabled HMRC to launch around 450 enquiries during the last 2 years, with around 250 cases being worked at any one time.
IR35 is viewed, quite correctly, by HMRC as a deterrent rather than a ‘cash cow’ which may explain why they are unable to provide reliable statistics of cost:yield ratio, preferring instead to bat off the question by stating, “In HMRC’s view, the effectiveness of its compliance activity cannot be measured solely by a comparison of compliance costs (to the extent that those can be identified accurately) to any direct yield recovered.” Furthermore, HMRC say it is not possible to accurately determine the administrative costing because their compliance staff undertake some non-IR35 work.
In their report, the Lords Committee urged the Government to re-examine the longer term case for integrating tax and NIC. Whilst the Government acknowledged that this is something they will take another look at, it will, for the time being, have to take a back seat as employers are still getting used to RTI.
Harmonisation of the two taxes would provide an effective remedy to IR35 as dividend income would not escape some form of taxation. However, such a long term strategy does need to recognise the important role small businesses play in the UK’s economy, by taxing them proportionately.
On Tuesday, members of the House including a former Director of the Bank of England and the Chair of OFSTED, were to debate the Committees report. The debate will be opened by former Chairman of the Committee and Ofcom’s new Deputy Chairman, Baroness Noakes. She is expected to be joined by other former Committee members Lord Palmer of Childs Hill, Baroness Bakewell of Hardington Mandeville and Lord Hope of Craighead. Others expected to take part in the debate include:
Lord Newby will respond on behalf of the Government.