Is HMRC’s Contract Review Service trustworthy?
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.
IR35 Enquiries
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.
Future of IR35
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 Empey, Vice President of the Institute of Export and former Committee member;
- Lord Myners, former Financial Services Secretary and Director of the Bank of England;
- Lord Higgins, Governor of the Institute of Economic and Social Research and former Committee member;
- Baroness Morgan of Huyton, Chair of OFSTED and former Committee member;
- Lord Stewartby, former Economic Secretary and Committee member; and
- Lord Davidson of Glen Clova, Shadow Spokesperson for the Treasury.
Lord Newby will respond on behalf of the Government.
Anyone that asks HMRC/CRS to make a determination for them is asking for trouble in my opinion. I never saw this as an advice service but as a ‘here I am come and get me’ letter, akin to volunteering to shoot oneself in the foot. Every other individual in the country can always be certain of their tax status, from the poor to billionaires, but we can’t be sure for many years as we can always make a genuine determination that we are outside IR35 only to be told years latter we weren’t, Manifestly unfair the entire thing, which is why the tories promised to repeal it when Labour brought it in, then in power repeal became review and now its a wholehearted defence of it ! You can’t trust politicians to keep their word so why would you trust HMRC who’s interest lies in determining you are caught by IR35 res?
‘here I am come and get me’………so is the box on your return that says “tick me if you are a service company”.
Once again they miss the bleedin’ obvious.
Merging income tax and “NI” does not solve the problem – they are, as usual, ignoring the fact that EmployERS NI is due in IR35 cases IN ADDITION to EmployEES NI.
That’s where the real iniquity lies, since this is one person’s remuneration that needs to be paid into a Ltd Co to come under the control of that person.
Then they deem it to be caught by some nutty laws and that means a PAYE scheme must be run, whereby the EFFECT is that the individual pays both forms of NI.
Yes, you can twitter on about the Co pays this and the individual pays that, but the EFFECT is that the individual pays both. After all, if the monies had been paid to someone who’s able to operate Schedule D (on a genuinely ‘self-employed’ basis) then they would simply be asked for Class 2 & 4 NI which is akin to Employees NI.
Employers NI however is at a higher % and applies THROUGHOUT one’s income at 14% in addition to the Employees NI.
That makes ‘double taxation’ look like a day at the beach – until they understand this key issue anyone ‘reviewing’ IR35 will continue to miss the point.
NOTE: The IR35 Forum completely missed this in their report – so where were the PCG and other so-called “experts” when they reviewed the draft reports? How did that report come to say that ‘the level of taxation faced by those caught by IR35 was broadly in line with that of employees”???
You may be forgiven for smelling a rat. Even those meant to be on the side of the IR35-oppressed have realised that they have vested interests in the legislation remaining in force. Alternatively, you may wish to believe that they are all incompetent to an incredible degree.
Hard to see any other possible explanations – can anyone else think of any?
If tax and NIC were integrated then it follows that dividend income would be subjected to a flat rate of tax whatever that may be. Presumably a separate rate would be applicable to dividends ex close companies so as not to be too punitive and to continue to encourage and reward entrepreneurship. The fact is though that HMRC would be receiving some tax on dividends and this should be sufficient to sound the death knell for IR35. Naturally, some safeguards would have to be put into place to prevent abuse of PSC’s. I have spoken to many HMRC inspectors over the years and they all agree that taxing dividend income above a ceiling would have been much more preferable to IR35
Andy #4
The tax payable on dividends is not income tax – dividends are classed as unearned income. The tax is paid by the company paying the dividend and it arrives with an effective tax credit to the recipient.
For a very long time successive governments have taken the view that unearned income should be taxed at a lower rate than earned income (I have never understood that) but if UK dividends were suddenly to pay 31% tax then you’d find investors driven away.
So whatever they do with income tax and NI, there’s a strong likelihood that it won’t apply to dividends.
Making separate rules about closed companies is possible but all companies are technically closed companies when you look at the legislation carefully – the “5 associated persons” rule is simply a rule of thumb currently applied by HMRC and has no basis in law.
The whole thing needs to be sorted out properly. My favourite “band aid” solution is to apply the new ER NI threshold at a higher level – instead of the current £2,000 make it, say, £20,000 and then no small companies would have to pay it.
Gradual increases beyond that level would lead to incremental abolition. ER NI is after all a crazy tax on jobs – in a global market it’s effectively a tax on employing British-based workers. As if they didn’t have enough disadvantages these days!