Contractors harbour grave doubts about HMRC’s grasp of IR35 reform

The taxman appears to be convincingly losing the battle for hearts and minds with private sector IR35 reform, among those that it affects most -- contractors.

In fact, more than eight in 10 limited company contractors believe that HMRC does not understand the potential negative impact of next April’s off-payroll tax.

Not even one in 10 think the opposite – that HMRC does ‘get’ the potentially adverse implications of IR35 reform in 2020, shows a poll of 1,200 contractors by QAccounting.

‘Five fundamentals’

Its boss Mike Butchart told ContractorUK that, although the PSCs were not asked to pinpoint the side-effects they were worried about, in his view the ramifications or issues are five-fold.

They are, in his words:

1. HMRC’s insistence that public sector IR35 reform has been successful.
2. HMRC’s misplaced belief that private sector IR35 reform will not harm genuine PSCs.
3. Clients’ knee-jerk ultimatums to contractors ahead of April 6th (pioneered by HSBC).
4. Increased non-compliance due to confusion about the ‘small company’ exemption.
5. Blanket rulings, wrongly forcing self-employed contractors to be taxed as employees.

“These aren't necessarily destined to happen on a big scale [in the private sector],” Mr Butchart caveated, referring to ultimatums and blanketing.

“But HMRC continues to insist that blanket determinations are not widespread in the public sector, despite there being evidence to suggest otherwise.”

‘Mixed messages’

Earlier this month, HMRC challenged a viewpoint piece on ContractorUK in which the author, the IHPA, stated that a HMRC-run IR35 webinar for NHS trusts endorsed blanketing.  

It has since emerged that the blanketing which was endorsed on the webinar was the role-based blanketing which HMRC has used IR35 Forum meetings to describe as ‘appropriate,’ and then ‘correct.’

Since those descriptions, given by the Revenue on contracts whose terms match and, respectively, on contracts whose terms and roles match, HMRC has also backed blanketing based on a single contract, where both terms match -- and roles match.

“For NHS trusts, that have in the past applied blanket decisions, any mixed messages from HMRC will simply add to the confusion,” warns status firm Qdos.

“The IR35 legislation states that blanket decisions are not compliant, while they also wrongly force contractors inside IR35, meaning these workers are overtaxed.”

‘Delicious irony’

The firm’s Seb Maley adds that, unlike some advisers who agree with HMRC that role-based blanketing is permitted, his team believes it is “vital” that each contractor is assessed individually to ensure accurate IR35 determinations.

His comments follow confirmation to ContractorUK by HMRC that it has assessed as many as 1,500 contractors at GlaxoSmithKline as caught by IR35.

Graham Webber, tax director at WTT Consulting said: “There is a delicious irony in the fact that HMRC claims blanket assessment for IR35 is [only] acceptable in certain circumstances [ -- role-based blanketing], and then claims 1500 people no doubt working in hundreds of different ways are all inside IR35.”

‘Fairly, consistently, focused’

But also speaking yesterday, a HMRC spokeswoman strongly suggested the contractors at GSK were not ‘working in hundreds of different ways.’

Asked about the HMRC’s new IR35 letters, including those to PSCs at the pharma giant, the Revenue spokeswoman said: “It is fair that two people working like employees broadly pay the same tax and National Insurance, even if one of them chooses to work through their own company.

“We treat everyone fairly and consistently and the same rules apply to everyone. HMRC works to ensure everyone pays the tax that is due under the law. Our compliance activity spans a variety of industries and is focused on specific areas based on our analysis of where current risks to the tax system lie.”

However the HMRC spokeswoman did not answer whether the tax authority ran a review of the 1,500 contractors’ working practices before declaring them caught by IR35.

At the time of writing, there was also no word from HMRC on whether it has been liaising with end-users to assess the existing IR35 status of current contractor workforces.

‘Woefully short’

But it is tax officials who QAccounting says ultimatum-issuing end-clients should look to, if they are to “better educate” themselves about IR35 in April 2020, with guidance or materials.

Finally published late last week however, long-awaited guidance from HMRC on how intermediaries and clients should prepare for, and reflect April 2020’s rules is not impressing.

Contractor body IPSE said: “The government’s guidance on the changes to IR35 next April falls woefully short.

“Not only does it not acknowledge how incredibly difficult it is to make accurate IR35 determinations; it also fails to offer guidance on how to do so.

“Similarly, it states that clients must take ‘reasonable care’, but then offers no guidance at all on what ‘reasonable care’ actually means.”

‘Dispute and disruption’

Agencies too will be disappointed, according to Andy Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE).

“It does not even begin to consider who should shoulder the burden of Employers’ National Insurance liability,” he said.

“This has been a major cause of dispute and disruption in the public sector where, in some cases, it has effectively been deducted from the contractor and in others it hasn’t. This needs to be clarified.”

More positively, the HMRC guidance does confirm the criteria to be a ‘small company’ – an exemption to the 2020 rules that QAccounting believes is ‘open to misinterpretation.’

Yet IPSE points out that neither the new HMRC guidance set, nor the legislation, requires the size of the engager to be forwarded to contractors or agencies, storing up “serious confusion about where IR35 liability ultimately lies.”

‘Next to no confidence’

Shown all of these perceived shortcomings with its guidance, the HMRC spokeswoman reassured by saying further educational support on IR35 including “webinars, workshops and one-to-one teach ins,” were all still incoming, ahead of the reform’s commencement in just over 31 weeks.

“You can understand why contractors have next to no confidence that the tax office grasps the possible negative implications of incoming changes to the rules,” Mr Butchart said.

“With the new prime minister now in place, the fact that the majority of independent workers have questioned HMRC’s competence should be for food for thought for Boris Johnson.”