Experts have called out the taxman for not addressing the realities of reform in evidence put forward for IR35 inquiry
The Finance Bill Sub-Committee has published HMRC’s written evidence submitted for their IR35 inquiry.
The committee urged the government to rethink the IR35 rules after the initial inquiry revealed “inherent flaws” with the regulation.
It then launched a follow-up inquiry in the wake of the changes taking effect in the private sector earlier this year, inviting professional bodies, businesses and contractors to take part.
HMRC’s submission to this inquiry has been slammed by industry experts, who claim the tax watchdog is not telling the full story.
Seb Maley, CEO at Qdos, said: “HMRC’s submission doesn’t tell the full story of the IR35 reform. The government paints a picture that suits its own narrative and interests rather than addressing the realities faced by contractors and businesses.
HMRC says ‘it’s too early’ to assess impact of IR35 reform
“The tax office says it’s too early to assess the impact of the changes and if reform has made it more difficult to engage contractors.
“It’s not too early. While more firms are getting to grips with reform, the fact of the matter is that it’s created challenges and resulted in contractors being forced onto the payroll.”
While HMRC said that it’s “too soon to have evaluated the impact of the April 2021 reform in the private and voluntary sectors”, it has highlighted the impact of the changes in the public sector.
According to the document, the taxman claimed the short-term effects of the 2017 reforms did lead to a decrease in the number of organisations – across all public authorities – engaging contractors.
Public sector reform led to fall in firms engaging contractors
Furthermore, HMRC reported that since the public sector reform, at least 50,000 people who were previously providing services through PSCs were enrolled on to PAYE scheme, raising an additional £250 million in tax revenue in 2017/18 and £275 million in 2018/19.
The tax office predicts that 180,000 contractors working through PSCs will be impacted by private sector changes, as well as up to 60,000 medium to large businesses and 20,000 employment agencies.
The reform is also estimated to bring in an additional £3.8 billion revenue by 2016.
HMRC still claims CEST tool is effective
Maley questioned whether these “assumptions” by HMRC are “based on contractors being fairly or unfairly placed inside IR35?”
He added: “[…] To say that IR35 reform has impacted only 180,000 contractors seems way off the mark, particularly when the government has previously said 500,000 people work through umbrella companies – a way of working inextricably linked to contracting and IR35.
Maley also highlighted how the taxman still claims that its CEST tool is “aligned with case law.”
“Again, it isn’t,” he said. “The tool hasn’t been able to determine a contractor’s IR35 status well over 200,000 times in the past year or so.
“What’s more, and despite this evidence making light of it, HMRC has no obligation to stand by an IR35 decision based on CEST.”
Government urged to review IR35 rules
Andy Chamberlain, director of policy at self-employed trade body IPSE who provided evidence for the IR35 inquiry, also raised concerns over HMRC’s submission.
He said: “One area that we were keen to press home was that mutuality of obligation remains difficult for businesses and individuals to assess.
“While HMRC continues to defend its interpretation of mutuality in its written evidence by citing recent case law, we believe that it isn’t that straightforward.
“The Court of Appeal has provided some further clarification on mutuality, but it does not wholly support HMRC’s view that sufficient mutual obligations can be established simply because there is a contract in place.”
Chamberlain added that IPSE is urging the government to “recognise the problems surrounding IR35” and launch a full review into the impact of the changes.