HMRC unveils IR35 discussion document

A "discussion document" on improving the effectiveness of IR35 – which this year is forecast to cost some £430m in non-compliance - has been published by the taxman.

Open for responses until September’s end, the 11-page document invites input in five main areas including a key one - giving engagers “more of a role” in ensuring IR35 compliance.

The government seems therefore to be returning to the original intention of the 1999 legislation, even though the CBI, the largest employers’ group, and the IoD, recently warned against it.

‘Remarkably scant’

The second most radical “options” the document outlines is aligning the test if IR35 applies with Supervision, Direction and Control, and putting a time limit on employment engagements.

Beyond these three, the document is “remarkably scant” on the details of ideas to reform IR35 says status advisory The Law Place but, without reform, the £430m a year revenue loss is projected to grow.

The HM Revenue & Customs document adds: “The [IR35] legislation is ‘little used’” it says, referring to findings by the OTS. “Only a small number of PSCs are complying [with it]”.

‘Huge can of worms’

So the attempt at reform has two aims; to protect the Exchequer and to ‘level the playing field between direct employees and those who would be direct employees if not for their PSC.’

“The idea HMRC seems most keen on [to do this] is to involve engagers - presumably end-users - in determining a contractor’s status,” says Seb Maley of status firm Qdos Consulting.

“[It] may seem sensible…but could open a huge can of worms. How [will] end users…react to being given an onus and potential financial liability when engaging contractors?”

This potential IR35 ‘sea change’ was predicted to ContractorUK by Graham Webber, of tax investigations specialist WTT Consulting, immediately after Summer Budget 2015.

‘No easy answers’

It has surfaced after what chartered accountancy firm Kingston Smith criticised on Friday as a number of “false starts” to tackle non-compliance with the Intermediaries legislation.  

Firstly, IR35 was reviewed in 2011 by the OTS; then the PSC Committee scrutinised it in 2014, only for the IR35 Forum (with HMRC) to assess it for improvements in 2015.

In its discussion document, HMRC all but admits these reviews fell short. Its January review failed to “fully address the shortcomings” and the other two found “no easy answers”.

The Revenue also admits that some say its false self-employment legislation has made matters worse, specifically by adding an incentive to work via a PSC to disguise employment.

Kingston Smith tax partner Tim Stovold said: “The suggestion [now] is that the burden of assessing whether IR35 applies will shift from the contractor to the business engaging” them.

 “Whilst this will mean less work for HMRC, it adds an additional administrative burden on businesses using contractors.”

‘Other types of intermediaries’

Compounding the situation for employers already tied up in red tape, the document raises the prospect of them having to police more than just PSCs.

In fact, while the HMRC paper says the intention is not to widen IR35’s scope, it also says it wants “evidence on the use of other types of intermediaries to which IR35 may apply.”

Similarly, end-users may not be the only “engagers” who will do the policing, as Qdos points out the term could cover everyone from multinationals and SMEs to individuals.

‘Not just another review’ 

The Revenue recognises this. It wants feedback on the engager being a person and says it will be consult a “range of stakeholders” – not just firms - about its lead option, outlined as:

“Those who engage a worker through a PSC would need to consider whether or not IR35 applies... and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees.”

It adds: “Making the legislation as straightforward to comply with as possible, and not creating disproportionate burdens on businesses or individuals will be core principles in designing any change.”

IR35 expert Kate Cottrell reflected: “This is not another ‘here we go again’ review where everyone shouts IR35 is too complicated so should be abolished.

“[Instead it] appears to be very much a case of let’s change [the legislation] in some way, so we can see some of the estimated £430 million a year that the government is losing.”

‘Everyone to have a say’

Asked what contractors should do between now and September (when the discussion document will close), Ms Cottrell said there were four steps that they should consider taking.  

1. Read the HMRC discussion document and contribute to the debate by emailing [email protected]
2. Bring the document to the attention of your agencies and especially your clients who may be asked to “take on more of a role in ensuring that the right amount of employment taxes are paid” (as the discussion document states on page 8)   
3. Get your accountant’s view of your IR35 position in writing and remember, IR35 status is not just about the contents of a written contract. The expert must comment on the reality of your day-to-day working practices
4. If you have been ignoring IR35, now is the time to be realistic and establish your position and liabilities, if any.

Cottrell, an IR35 forum member who runs her own status advisory having retired from the Revenue, explained that the five steps reflected the overtones coming from HMRC.

 “The key message is that too many have been ignoring IR35 for too long, so it will be changing,” she said. “[But] it is encouraging that we at least have a little time for debate and any change is likely to coincide with other changes and be effective from April 2016. The discussion document is a real opportunity for everyone to have a say.”