The latest IR35 Forum minutes held on 11 December 2017 reveal that HMRC will likely be introducing IR35 reform into the private sector as soon as they possibly can, as there is an “immediate need to consider how best to tackle non-compliance in the private sector…”
As announced in the Autumn Budget, the minutes echo that there will be a consultation process in 2018 as “the Government will carefully consult on how to tackle tax avoidance in the private sector…” along with Government-commissioned external research which will be published this year. There will also be a consultation in response to Matthew Taylor’s report on employment practices in the modern economy, considering longer term reform which the minutes confirm “are related”.
HMRC are still attempting to flaunt the success of IR35 reform within the public sector, stating that “compliance is increasing”. In some cases, this may be true, but there will also be circumstances where a public-sector body has adopted a blanket approach to the IR35 reform, where any contractors engaged have to operate inside of IR35. This cannot be called ‘compliance’, and very often will be the opposite of compliance where contractors are forced to operate inside of IR35 to continue to work.
This issue was brought up by Forum members, and HMRC confirmed that making blanket decisions without considering the contractual terms and actual working practices is not the right course of action. However, one wonders how quick HMRC would be to challenge a blanket inside IR35 decision.
The CEST tool came under fire again for failing to consider one of the key employment status tests; Mutuality of Obligations (MOO). HMRC’s response to this was that it is already assumed that MOO exists where someone is required to take the test because MOO is necessary for a contract to exist. This in our opinion fails to grasp MOO fully, which was shared by some forum members who also challenged HMRC’s argument. HMRC advised that they would provide a “considered response” to questions over the elimination of MOO from the CEST tool.
Forum members expressed their concerns regarding further reform simply acting as a “bolt on,” rather than properly tackling the issues over IR35 and employment status. HMRC responded by stating again that there is an “immediate Exchequer risk which needs to be addressed.” The cost to the Exchequer of non-compliance with the off-payroll rules is estimated to be £1.2billion by 2022/23.
The IR35 Forum will now become a subgroup of the Employer’s Payroll Group (EPG). In the minutes of the last EPG meeting, reform of IR35 in the public sector was mentioned, and once again was hailed as a success. HMRC stated that “IR35 protects more than £500 million…however non-compliance was estimated to cost more than £400mi in 2016/17…so far PAYE registrations and returns showed increased compliance…not seeing significant drift away from the public sector despite contractor press.”
This does not reflect the impact of the legislation and we only have to look at the NHS, with many trusts in crisis due to a lack of resources. Although IR35 reform may not be the sole reason for its current downfall, the change in legislation will undoubtedly have had a part to play and will certainly not have helped the situation. It’s worth noting that many NHS trusts are adopting blanket inside of IR35 decisions.
If there is such an immediate risk to the Exchequer, you could be forgiven for wondering what HMRC are doing about the bigger tax avoidance issues, for example those highlighted by the ‘Paradise Papers.’ It seems that HMRC are determined to roll out IR35 reform within the private sector and do not intend to delay. The consultation process appears to be more a case of dotting the i’s and crossing the t’s.