BBC impact – report on IR35 should open eyes to reality

The following announcement was submitted to ContractorUK on 28.11.2018:

The recent report from the National Audit Office (NAO) concerning the impact of public sector IR35 rules on the BBC in 2017 should be taken seriously.

What is clear is that until the new rules were imposed the BBC was happy to engage with PSC contractors, even recommending that individuals should operate through PSCs. This stance would undoubtedly have been on advice that an engagement with a PSC avoids the giving of employment rights, saves payment of employer’s NICs whilst at the same time providing the individuals with higher net receipts resulting from lower company tax and dividend rates. As the BBC would not be liable for contractor tax, the advice would make sense.

From April 2017 the BBC was effectively forced to review its policy in order to avoid serial tax avoidance penalties. It took some time for the BBC to rearrange its processes, it sought an extension of time to implement, at the same time making significant payments on account to HMRC. The NAO indicates that this may have been because of the short lead-in time. Ultimately the result has been an entire review of its contractor arrangements and seemingly regular use of HMRC’s status indicator tool – CEST. So far so good.

However in the course of switching to the new processes, the NAO report indicates that the BBC identified that assessments of status previously made were not always confirmed by CEST. Indeed the contrary. CEST attempts to assess employment status, and it is notoriously difficult to be precise about such status in the absence of an actual employment contract. Consequently the CEST tool may get it wrong, and much has been written about the inaccuracy and inappropriate use of the tool, including our own criticism. However CEST exists and HMRC says it will stand by the result if the information entered is correct, hence the BBC’s use of it.

Yet for all its shortcomings CEST is there to help and in some cases it does. In other words it should not been taken for granted that the results from CEST are always incorrect. Independent contract reviews, that accountants have historically advocated, may have been favoured by contractors over the years, but surely HMRC has a point. Contractors purporting to operate outside IR35 have not always been outside but may have been encouraged to claim that status by relying on unreliable contract review results, particularly those set up on a bullet point checklist basis. The result has been lost revenue. HMRC wants to stop this kind of avoidance hence the public sector rules and the proposed extension. Contract reviews may have been good for contractors, but if the existing public sector rules are extended to the private sector, hirers and agencies will be in the tax liability firing line, making reliance on a review outcome risky. Tax risk is a key driver for genuine compliance.

So whilst the NAO correctly records the problems the BBC has had with employment status tests, including the CEST tool, the solution is not to seek reviews elsewhere, save perhaps in high value cases. Although in-depth reviews can be undertaken by suitably qualified and insured specialists such as ourselves, these will always cost more than the cut price reviews of the past, making them unviable in many cases. The old adage applies – you get what you pay for! Engagements that are genuinely outside IR35 are often very obviously so and even CEST will usually confirm the position.

Post April 2020 those liable will want certainty, not speculation, and unless HMRC comes up with some other proposition, there is simply no test that can be applied that is capable of ruling out an HMRC investigation. In-depth reviews may play a part, but assuming the new rules will be the same as the public sector rules, the question will not be which test to use, but how to operate legitimately without the risk. I suspect the BBC will now know this to be true.

The author is recruitment industry specialist lawyer Adrian Marlowe, managing director of compliance and legal consultancy Lawspeed, www.lawspeed.com.