HSBC’s shallow IR35 wheeze suggests murkier water ahead for contractors

Last week’s ContractorUK exclusive about HSBC’s purported strategy to deal with next year’s proposed IR35 changes signals more murky water ahead for contractors, writes Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE).

The suggestion is that contractors at the bank face being crudely carved up and either dumped, offered permanent employment or kept on via a mysterious third-party structure, the benefits of which remain distinctly unclear.

HSBC’s official line is that they haven’t yet decided how they will handle IR35 compliance. I will refrain from commenting on specific cases, but what is clear is that this catastrophic policy is already starting to cause complexity, confusion and chaos in the private sector a year before it comes into force.

Sadly, I doubt that HSBC will be the last example of very damaging uncertainty among the self-employed and their clients. Our most recent Freelancer Confidence Index shows that people in the sector are more concerned about government fiscal policy (67.5%) than they are about the shambles of Brexit (61.3%). This dire picture is the result of years of confusion not just over IR35, but also employment status, the Loan Charge, Making Tax Digital and National Insurance.

That a Conservative and supposedly ‘pro-business’ government should go out of its way to scupper one of the UK’s most productive and dynamic sectors is beyond alarming. Each year self-employment not only creates 76,000 new microbusinesses; it also adds £275billion to the economy.

We know the changing labour market is a challenge for HMRC. Nineteenth century ways of working, where tax is collected at source from a single employer, are of course easier for the Revenue. But that’s just not the future of work. IR35 wasn’t fit for purpose when it was created 20 years ago, but now it’s a shackle on one of the fastest-moving, modern and most innovative parts of the economy.

As the current chancellor Philip Hammond himself said in 2001, “One reason why the government’s IR35 initiative has been so damaging and destructive is the fact that it has hit at the most flexible part of the economy.” Well, I would love to hear him explain why he now supports such a ‘damaging’ policy now.

It’s not as if the government hasn’t got a canary in the coalmine. When the changes to IR35 came into force in the public sector, IPSE and others predicted chaos, and we were right. In the NHS alone, 80 per cent of hiring managers reported a substantial increase in their workload because of IR35 and 70 per cent struggled to hold on to vital contractors. There is no doubt that this would have affected patient care.

We also know that this initial off-payroll working rollout caused significant problems for the BBC, government departments and HMRC itself. Most recently, Network Rail reportedly put 99 per cent of its contractors with IR35, which sounds simply preposterous.

More worryingly, the government is pressing ahead despite HMRC’s recent tax tribunal losses to the likes of Lorraine Kelly and Kaye Adams. In both cases, high-profile figures were dragged through the mud, accused of avoiding tax and forced to spend tens of thousands of pounds defending themselves against IR35 cases that should have never been brought.

Woefully, these are not isolated incidents. There have been six IR35 cases in the last year. HMRC has lost five of them. Kaye Adams spoke after the judgment about how much the case has cost her, and how it wasn’t just TV stars: the impact of IR35 on ordinary taxpayers implicated was likely to be profound too.

Adams and the others were up against the weight of a large government agency, which is part of the department that itself sets the IR35 rules, and HMRC still came out on the wrong side. These cases must have cost taxpayers an enormous amount in lawyers’ fees, civil servants’ time and the cost of the tribunals themselves.

So IR35 is clearly a drain on the economy and the country in many ways. The real question for the future, though, is if massive organisations like HMRC and HSBC are struggling to manage IR35, what hope is there for other businesses when the changes to the private sector come in next year?

The vast majority of freelancers want to pay the right, fair amount of tax. They use public services and are happy to help pay for them. But there is nothing fair about the IR35 changes that the government is trying to bring in next year. These changes caused chaos in the public sector and left many contractors wrongly caught under IR35. And the damage and injustice will be even worse in the larger private sector.

Right now, there is a consultation on the changes to IR35 and the government must use it to listen to the experts: scrap this scheme and finally come up with a tax system fit for the broadband age not the dial-up era.