New Year, Same Old IR35 taxman

A new year presents everyone with the opportunity to look back on the previous 12 months, learn from their mistakes and better themselves. It’s a theory – and opportunity, that applies to you, me -- and even HMRC, writes Seb Maley, chief executive of Qdos Contractor.

While the changes that you and I make in our lives individually will likely have little impact on the well-being of millions of others, the same cannot be said for HMRC. The taxman’s approach to enforcing IR35 compliance, in particular, continues to place an enormous financial and psychological burden on the UK’s contractor workforce.

Inauspicious

In 2019, HMRC would be wise to change tack and review the way in which it treats independent workers. But what are the chances of this happening? Well, if January is a sign of things to come, the taxman’s failure to acknowledge the issues stemming from the BBC’s IR35 debacle last year -- laid bare in a report by the National Audit Office -- is perhaps a sign that we should expect more of the same in 2019. Unfortunately.

A few weeks ago, Mel Stride, the financial secretary to the Treasury, made it clear he does not believe that the NAO report into the BBC’s behaviour reflects other public sector organisations’ handling of IR35.

In response to shadow DUP spokesman Gregory Campbell, who asked whether the chancellor plans to assess the NAO report into the BBC’s engagement with Personal Services Companies (PSCs), Mr Stride effectively said ‘no.’ Specifically, Stride said the report “concerns one organisation’s use of PSCs over the last two decades, concluding with its experience of implementing the April 2017 reform of the off-payroll working rules in the public sector. The report does not comment on the off-payroll working rules themselves.”

These rules do affect the self-employed

Worse still, he then repeated what has now become a somewhat tired and predictable HMRC rhetoric, stating that “the rules do not affect the genuinely self-employed.” Tell that, Mr Stride, to the reams of self-employed whose clients banned their mode of working via a limited company pre-April 2017. And tell that to their self-employed counterparts in the private sector, whose clients have just been told that they can deem everyone of them as no longer self-employed if they first review just a single contract in place between their organisation, and just one of their PSC contractors, whose T&Cs and role matches the rest of their co-contractors.

Worryingly from a policy perspective in terms of what to expect from the government in the imminent private sector off-payroll consultation, HMRC refuses to acknowledge the findings from the NAO report, which show that hundreds of on-air freelancers and contractors working at the BBC were forced to work inside the rules or risk having their contract cancelled.

And not for the first time, Mr Stride has buried his head in the sand, claiming that IR35 does not impact ‘genuinely’ self-employed workers. This simply isn’t true. As we all know, poorly structured and badly implemented reform in the public sector mean thousands of genuinely self-employed contractors are still being placed inside IR35 as a result of risk-averse decisions made by engagers. A barrister has even said that the scale of this wrong decision-making is so large, that it will fall to the MP-led committees of the future to sort it all out.

Three-quarters of you have 'zero or very little confidence'

But as the focus from all of us turns towards the incoming private sector changes (HMRC’s focus too, given that it has said it will not further scrutinise the impact of the 2017 reforms on the public sector), what do contractors themselves make of their fate?

Ominously, 77 per cent of contractors freshly polled by us say they have either “zero or very little confidence” that the private sector will be prepared for the IR35 changes in April 2020. Twelve per cent say the opposite -- that their client will be ready in just over a year’s time --- impressive, considering we don’t yet know the scale or design of the framework. A more realistic 11 per cent of the 1,400 contractors polled say they simply have no way of gauging if their engager will be reform-ready by next April.

While troubling to the professional contractor community, these findings will unsettle recruitment agencies too, as for many years now they have consistently relied on temporary openings and the flexible candidates to fill them. Oh, and potentially more concerning for agencies, under the 2020 framework it’s possible that they will carry a tax liability despite not being in charge of setting the IR35 status of contractors they place.

Change isn't a coming

It’s the same potential ‘carry the can’ scenario for recruiters in the public sector, but despite representing the first truly independent probe into those rules which hit the sector in April 2017, the NAO ‘s findings have simply not been taken seriously. At least not by HMRC. It’s further evidence that the tax authority isn’t looking to change its ways. Maybe we shouldn’t be too surprised. Over the years, contractors -- and taxpayers at large -- have come to expect nothing less from what has become an increasingly aggressive, blinkered and intransigent HMRC.

November’s NAO report also highlighted concerns about the use of CEST. Apparently, HMRC’s IR35 tool failed to determine whether 50% of the 255 working arrangements put through the IR35 digital tool belonged inside or outside IR35. Despite this, 92% of these contractors were placed inside IR35!

None of this bodes particularly well for the arrival of the IR35 consultation, which is set to be published next month. IR35 experts have outlined the importance of the government carrying out a thorough review of the impact of the public sector changes -- something it has promised to do, contrary to HMRC’s indications to the latest IR35 Forum (see point 35 of the minutes).

What HMRC's got to regain sight of

The upshot? We have a taxman with no intention of standing back and reviewing his stance on IR35. So don’t envisage the details of 2020's IR35 framework differing too much from those released in the lead up to public sector reform a few years ago. HMRC is unimaginative, stubborn and isn’t interested in listening to (and acting on) advice from independent experts or the people these changes impact most; contractors.

What’s got lost at HMRC is that independent workers actually just want fairness (not a huge ask), and a far stronger obligation on engagers to act responsibly and ensure they can administer the off-payroll rules accurately. The way things stand, public sector engagers are not penalised for incorrectly determining contractors as inside IR35. The rules are very one-sided, which is why independent workers will no doubt be keen to see a clear appeals process for what is a common situation. HMRC’s intentions and specific plans for private sector reform will become a little clearer very shortly. But frankly, if the taxman’s refusal to take into account the reality of the situation or accept a report from one of the country’s most respected watchdogs is an indication of things to come, we mustn’t rest our hopes this new year on HMRC righting its wrongs by turning over a new leaf on IR35.