Now's the time to fight HMRC's worrying IR35 proposals

Late last month, HMRC showed how it wants to radically change the way IR35 works for contractors in the public sector in a set of proposals that are nothing short of worrying, writes Andrew Chamberlain, deputy director of policy for The Association of Independent Professionals and the Self-Employed (IPSE).

But be under no illusion. Along with the wider contracting community, we will robustly fight the proposals announced in the HMRC consultation of May 26th, which the government intends to come into force from April 2017.

As we outlined following the Budget in March, the government wants public sector organisations or the agency to determine the IR35 status of engagements and then, if IR35 applies, request taxes as they would for their employees.

Can the online tool work?

In order to determine IR35 status, HMRC plans to develop an online tool. The client, or the ‘engager’ (as referred to in HMRC technical documents) will enter information about the nature of the assignment and the tool will generate an ‘in’ or ‘out’ result. If it is deemed to be within the scope of IR35, then employment taxes will be automatically deducted through the Real Time Information (RTI) system. If ‘outside’ IR35, the contractor can be paid gross and account for tax as they do now.

Our organisation has serious concerns about whether the tool will provide accurate and unbiased results. If there’s one thing we know for sure about IR35, it’s that you can never really know about IR35. It’s notoriously complex. Two experts can look at the same case and come to different conclusions. It is therefore impossible to imagine a generic tool that will get it right 100% of the time.

There is also the issue of bias. HMRC takes a different view to many external experts on what constitutes an IR35-caught engagement. This is demonstrated by the tribunal cases that HMRC fought and lost, before they stopped taking IR35 cases to tribunal altogether. HMRC would look at the working practices and consider them to be inside IR35. However, more often than not, the tribunal would disagree with the Revenue’s determination.

It seems likely that the tool will conform to the HMRC interpretation, even though in many cases this wouldn’t be the view of legal experts.

Employment rights (or lack thereof)

These new proposals on IR35 blur the boundary between employment rights and tax status. The government wants to tax independent professionals as if they were employees, but not give them employment rights. This is unfair and possibly a bit naive on the part of the government.

If workers are taxed like employees it is likely, and not unreasonable, for them to expect employment rights. This will cause tensions between the worker and engager, which in turn will give rise (in all likelihood) to legal challenges.

The impact on public services

Faced with the prospect of intrusive questioning from public sector clients, the very real possibility of being taxed punitively and unfairly, and being denied the same employment rights that would apply to anyone else paying the same taxes, it is reasonable to assume that many will seek opportunities outside the public sector.

This will leave public sector bodies, including government departments and the likes of the BBC, struggling to fill vital roles as the freelance businesses they rely on refuse to take up contracts. Projects will stall and public services will be badly hit.

In order to meet this challenge, public sector bodies will have to do one of two things: pay contractors more (with significant costs) or turn to consultancies to fill the void (with very significant costs). Either way, this proposal will delay delivery and likely increase the cost of vital public services.

The tricky path ahead

For now, these proposed changes are limited to the public sector, and the rules in the private sector will remain unchanged. However there are inevitably concerns that if this measure can be ‘successfully’ brought in to the public sector, further down the line the government will seek to apply it to the private sector too. It is therefore essential that the proposal is challenged effectively -- now.

We recommend that individual contractors, especially those with public sector experience, respond to the consultation personally. Let the government know how this will affect your business and your public sector clients. We will consult widely with our membership and other stakeholders as well as engaging directly with HMRC. We will be putting the full force of our lobbying efforts into this, and we need all the support we can get from the wider contracting community.