IR35 experts size up ‘customer segmentation’ model

The taxman astutely closed the first IR35 Forum meeting by roping in its industry members, not all of whom showed up to the inaugural session, to the follow-up on Wednesday June 29th, “in order,” the minutes show, “not to lose momentum”.

Although not on the panel, one IR35 advisory believes that it is actually the interest and understanding of taxpayers, the people most affected by the rule, that the forum is more at risk of losing if its key proposal is not renamed.

“‘Industry focus’ [is] something that everybody would understand rather than the use of marketing-speak,” said Qdos Consulting, finding fault with HMRC’s proposed term “customer segmentation”.

It is one suggestion that is likely, in some form at least, to reach the Chartered Institute of Taxation or the Institute of Chartered Accountants of Scotland, as both accountancy bodies are asking for ideas for the forum’s consideration.

Due to such taxpayer and industry input still being submitted, some contracting groups claim it is too early to comment on what direction the forum, and its plan to improve IR35’s administration, is taking.

The PCG for example, set up to oppose the original IR35 proposals, told members upon receipt of the forum’s inaugural minutes that it “would be inappropriate to speculate after one meeting.”

But speaking this week, the IR35 specialist seconded by the Office of Tax Simplification to write the OTS review on IR35, who sits on the forum, sounded quite definitive about the future.

“Finding a way to differentiate between the ‘agency temp’ and the ‘professional contractor’ will be the challenge,” said Kate Cottrell, also of Bauer & Cottrell. “The key to the success of segmentation is to ensure that the segments accurately reflect the situations and behaviours of those within them.”

This is no easy task, according to Bob, the retired tax advisor, but he says it is one that officialdom must take on.

He believes the forum was right to observe, in point 9 of the minutes, that what HMRC regards as attempts to avoid tax can merely be a reflection of what people have to do to get work.

“The labour market is such that increasing numbers of workers are forced to look for agency work simply because it is the only way of following their chosen profession,” Mr Jones explained.

“This [type of worker is a] million miles from the person who works extra hours as a weekend turkey plucker during December”, and from the person who sets up their own business.

“This state of affairs has evolved over a period of time and the government of the day has to take some responsibility.”

He’s likely to be encouraged by Ms Cottrell’s verdict that HM Revenue & Customs, and the IR35 Forum, has not only the “power” to ensure consistent treatment and processes for dealing with IR35 across the UK, but the “appetite” as well.

"Providing we can iron out the detail for customer segmentation, those potentially affected by IR35 will be able to establish their level of risk of IR35 investigation,” she said.

Yet seeming to question the need for the model, Qdos pointed out that the industries and sectors where the use of contractors is more prevalent - and therefore suggestive of greater application of IR35, are already known.

“Whilst this [customer segmentation approach] will help to identify distinct groups, surely we all know that… [with IR35 cases it is the] oil and gas, engineering, aerospace, finance, management consultancy and IT sectors.”

More positively though, the firm’s Seb Maley says that should the aim of customer segmentation be to recognise “certain characteristics” as unique to work in a certain sector - and to make an “allowance” for them when taxpayers self-assess their risk to IR35, then it “is to be welcomed.”

Point 18 of the forum’s minutes, which says taxpayers will decide whether HMRC views them as low, medium or high risk under IR35 where each category or ‘segment’ has HMRC-issued guidance to inform their decision, is in line with this approach.

“[But] how long will it take HMRC to produce targeted guidance for each sector?” Mr Maley asked. “Depending on how many sectors the forum believes are potentially affected by IR35, we could be waiting some time yet for the publishing of such guidance.”

Still, no single IR35 expert or employment status adviser has dismissed the customer segmentation approach outright, and it appears more workable to all parties, as a way to improve IR35 administration, than so-called ‘gateway tests’.

Serving as an explanation as to why, in spite of its challenges, the taxman’s customer segmentation model, predicated upon self-assessing one’s exposure to IR35, is not being shouted down, Mr Jones reflected:

“It is not an unreasonable request for a person to know with certainty how they stand in relation to their obligations. You cannot run a system where employment is based on a personal opinion.”

He added: “When I worked as an investigator for the Revenue, I had a principle where if I could get 95% of the answer with 5% effort I did not then expend 95% effort to get the other 5%. If customer segmentation, or anything else [from the IR35 forum] for that matter, can achieve that sort of success rate then I am all for it.”
 

Further reading: Will the Swedish Derogation model boost my pay?