When a few IR35 updates come along almost at once

Contractors sometimes have to wait many months for an official update on IR35 but just like our in-tray, a steady stream of activity related to the rule has happened in the last few weeks, writes Kate Cottrell of IR35 advisory Bauer & Cottrell.

First there was an MP’s question about IR35’s enquiry yield. Then we got an official estimate of IR35’s impact. That was followed by the release of the IR35 Forum’s November minutes. And as if all that wasn’t enough, the forum’s February minutes came out this week.

Firstly then, the MP’s question. The answer given by the Treasury is that since the new IR35 administration began in 2012/13, there’s been a jump in the number of cases opened to 256, which yielded £1.1m (just a bit less than the previous year). The Treasury’s answer to the MP also states that in 2013/14, there were 192 cases which had a yield of £430,000.

So what’s happening?  As with any work of this nature, cases rarely start and end neatly in a tax year, so although HMRC opened 192 new cases in 2013/14, we do not know how many were still being worked for earlier years. 

As with all statistics, care should be exercised. For example, we do not actually know how many cases from which this yield was gathered or how many cases are in the pipeline with large or small yield attached to them. What would be said if the £430,000 came from just one case?! Consequently, it really is impossible to read anything concrete into these figures other than the fact (as confirmed by HMRC in February’s IR35 Forum minutes), that the department is resourced to open 250 cases “at any one time.”

HM Revenue & Customs’ figure of 250 new IR35 cases seems about right, considering the size of the IR35 teams. I think that knowing the number of IR35 enquiries in play is a good thing and shows transparency. Also, if the IR35 population is around 200,000, then one positive to take from this is that those affected by IR35 are not being targeted unduly compared with any other taxpayer group. 

A simple division of this ‘IR35 population’ by the costs identified by HMRC in its published report shows that the annual cost of IR35 to contractors is £60 – much less than some of the numbers put out by the industry. While the debate over what IR35 actually costs will rumble on, and vary from contractor to contractor, what’s clear is that HMRC is standing by its figures (total admin burden is £15.9m; total amount of revenue protected is £550m). The report shows that the Revenue also backed up these two figures using various sources and research.

But similar to the caution I expressed before when looking at the figures for IR35’s enquiry yield, data and statistics of this kind should be approached with care. Measuring any sort of deterrent effect requires certain assumptions to be made and inevitably criticism has followed. 

In spite of this, the key message from HMRC is that it is sticking to its statistical guns -- it is effectively reiterating the £550m figure it gave to the House of Lords (as the cost of abolishing IR35) and it has established a much lower figure for the cost of compliance. This is telling as to HMRC’s mindset, and its intent.

It is statistics that played a part at the IR35 Forum’s November meeting, but the larger focus was on the IR35 Review. Other discussions considered the future constitution of the IR35 Forum; a lower meeting frequency and reducing the size of the minutes. Personally, I doubt if contractors care much about the frequency of IR35 Forum meetings. Some commentators have raised false hopes about what the Forum could achieve, as the IR35 legislation was and remains unchanged (except for the minor amendment to include office-holders for tax not just NIC). Meanwhile, meeting less (three times we’ll meet each year, not four) is wholly in line with all the other forums that HMRC runs, and shorter minutes are no bad thing for any meeting!

But the Forum as a mechanism to improve IR35’s impact on contractors isn’t going anywhere. Indeed the IR35 Forum will not be affected by any change of government, on the basis that it is an HMRC Forum so it will continue its work to improve the administration of IR35, and will remain in place to give those affected by IR35 a voice.   

The latest Forum meeting, in February, is a case in point. On behalf of contractors working in the public sector, I raised the issue of messages needing to go out to government departments once the BETs are scrapped in April. These messages are necessary because of the inconsistent approaches to the assurance process/requirements across the public sector that we as advisers have witnessed, and contractors have had to endure. The good news is that HMRC is now working with Treasury on updating guidance before 6^th April. This really is an opportunity to address these inconsistencies now and avoid further ones cropping up.

So it’s a case of hopefully positive changes for contractors where there’s government money at the end of the line but, for most contractors, IR35 remains exactly as it ever was. Moreover, the advent of the onshore intermediaries reporting requirements, and the IR35-style framework being contemplated to pare back relief on T&S expenses, seems to solidify the legislation as the most important decision contractors have to make. And as our in-tray receiving new requests to defend contractors  in IR35 investigation cases shows, HMRC has identified certain risks including -- but not exclusive to -- IR35.  Indeed, all our current IR35 investigation cases are also concerned with other issues such as expenses. It seems that this important decision for contractors is getting more important, and potentially more costly too.