Still a long way to go until HMRC ‘gets’ IR35 reform

On Monday, contractors who tuned in would have been pleased because as soon as HMRC’s progress review got underway with the Public Accounts Committee, Meg Hillier MP, got the ball rolling by immediately questioning HMRC’s Jon Thompson and Jim Harra on the accuracy of CEST -- the much-maligned IR35 tool, writes Seb Maley of Qdos Contractor.

In particular, Ms Hillier drew on the BBC director-general’s description of CEST, in which he spoke of it being ‘not-fit-for-purpose’. Unfortunately (and rather predictably), the two top men from HMRC rebuffed Lord Hall’s thoughts, and adamantly stated that HMRC will -- in the vast majority of cases -- stand by the results it provides. Worryingly, it emerged that CEST has now been used 750,000 times since its controversial introduction just a handful of weeks before the arrival of public sector reform in 2017.

Perhaps Lord Hall’s ‘not-fit-for-purpose’ comment was alluding to the fact the government can’t seem to settle on an effective IR35-testing method. Bearing in mind we’ve had the Business Entity Tests (BETs), the assurance process without BETs, and now CEST, how can anyone trust the government’s advice? The rules just keep on changing. It was this point that should have been clearly conveyed to HMRC at Monday's hearing.

While the importance of HMRC justifying its position on CEST is important, it was a real shame that neither Mr Thompson nor Mr Harra were particularly hard-pressed on their answers. If the tool -- as was claimed -- deems the majority of contractors outside IR35, then why are public sector engagers still making ‘blanket’ IR35 determinations more than a year down the line? These figures are also at odds with the experience of the BBC, where over 90% of presenters who have taken the test were deemed ‘inside’ IR35. This is another point that the PAC was well-positioned to make, but didn’t.

However, hats off to Ms Hillier for merely broaching the complex subject of IR35 in this PAC meeting. It’s not an easy legislative subject to tackle. Nevertheless, we might have learned more if HMRC were also made to explain the implementation of the public sector changes too. On top of that (the consensus is that it was a mess), CEST’s logic and therefore reliability leaves a lot to be desired. And so does the taxman’s virtually non-existent enforcing of the rules.

Like many viewers I imagine, I was left wondering whether HMRC would have been made to work harder in the evidence session if there was another MP in the room -- or an IR35 expert.

Remember, IR35 has been front-page news, and has the potential to impact all two million UK contractors; the entire public sector, and in time, possibly the private sector too. The PAC meeting, albeit a step in the right direction, did signal that MPs must show more interest. With private sector IR35 reform looking increasingly likely, soon they might not be left with a choice.

They should have hopefully realised by now that the conversation around CEST was over far too quickly. It didn’t help that none of the committee wanted to ask their own question of HMRC.

However, HMRC’s reiteration that they will stand by the answers the tool provides – while predictable, does stand out as something which could easily backfire. If HMRC were to support almost all of the determinations CEST delivers (which is incidentally a promise they have made time and again), they could make life harder for themselves. After all, they would be forced through a long and expensive process to check the answers were correct and stood up against case law. In reality, in a case, HMRC won’t be able to stand by anything until an IR35 enquiry is effectively carried out. So in this sense, how different is CEST to an assessment made by anyone else?

Monday's PAC meeting was a prime example of HMRC’s blind faith in CEST, and their refusal to listen to the individuals that IR35 reform is obviously impacting. And it is this ignorance which could be HMRC’s undoing. It’s of real concern that criticism of CEST continues to fall on deaf ears, which ultimately has the potential to endanger UK contracting.

For IR35 reform to be manageable, it’s vital that HMRC addresses CEST’s obvious shortcomings and completely rethinks the way in which it approaches these kind of conversations. Unfortunately, the PAC meeting simply highlights how far they still have to go.