Lords scrutinise IR35 reform’s costs, in their latest probe into ‘David Vs Goliath’

Three unanimously critical verdicts on private sector IR35 reform were sounded yesterday to the Lords inquiry into the off-payroll rules, the cost of which pervaded the session.

Asked if HMRC has sufficiently helped taxpayers with the rules; if Rishi Sunak should unveil them in April, and if the rules are a “challenge”, all four experts agreed on all the counts.

The one-word answers (‘no’ ‘no’ ‘yes’ respectively), came from Julia Kermode of the FCSA, Andy Chamberlain of IPSE, Abigail Agopian of the CBI and Lorence Nye of the FSB.

But throughout the session, the Lords seemed more interested in the expert quartet’s handle on how much they expect the reforms to cost HMRC, companies and individual contractors.

'Costs might become an important aspect'

In fact, all the witnesses (except Mr Nye) were asked by the peers and have agreed to provide written estimates of different aspects of the reform’s financial impact.

Lord Tyrie seemed to sum up it best when he told the CBI’s Ms Agopian: “[The costs of these IR35 reforms] might become an important aspect of this whole debate.

“[We seek] both the annual and the one-off cost; the gross and the net, so that we can clearly see what the Revenue are estimating the cost to be and what the cost to businesses and those affected are likely to be.”  

'Upwards of £700,000 per large business'

Aside to some confusion in the session over what the official estimates relate to (the one-off impact is £14.4m; with “negligible” ongoing costs due to a projected £5.3m saving being cancelled out by a projected £5.3m cost); HMRC’s forecasting was effectively rubbished.

“Business have given [us in the last few weeks] indicative figures, ranging between £100,000 to upwards of £700,000 [to get IR35 reform-ready],” began Ms Agopian, the CBI’s principle tax adviser.

“And a lot of those [large businesses] sit at the higher end of the range...but if you take the £14.4m, and split it across 60,000 engagers and 20,000 recruitment agents…that works out at [just] £180 per entity affected.

“I struggle to see -- with such a complex area of tax law -- how anybody, even with just one or two contractors, could implement this for £180. I mean, if you just look at those large business costs alone, that 14.4m would be wiped out very quickly.”

'Lost contracts'

As to the cost of IR35 reform to individuals, the FCSA’s Ms Kermode said that she knew of a £600 a day limited company contractor who, if declared caught, would need to be on a £1,000 a day just to break even.

But the session also heard some of the difficulty in coming up with a ‘per contractor cost figure’ as, wrongly put inside IR35, some PSCs will end up paying more tax than they should, submitted Mr Chamberlain.

Other PSCs will incur the cost of “lost contracts,” said Mr Nye, which a survey by staffing firm SThree is due to show in the shape of 18% being banned by their client just for being a PSC, said Ms Kermode.

'Very hard to unravel how contractors might get refunded'

Further muddying any cost per contractor estimate, which the peers heard may need to factor-in the impact of retrospective investigation by HMRC, some PSCs could conversely save in the “long-term”, due to no longer requiring accountancy services or insurance.

Mr Chamberlain of the Association of Independent Professionals and the Self-Employed (IPSE) also submitted: “It’s very hard to unravel [how small operators will be able to be refunded National Insurance Contributions if the ‘inside IR35’ determination is eventually found to be wrong].

“You’d have to wait currently until the end of the tax year to do the [self-assessment]. And then you’d spark an investigation -- and that would run along for a couple of years, and then [finally, it might] eventually be decided that, no, IR35 didn’t apply.”

'David versus Goliath'

Acknowledging that some PSCs might just go along with their inside IR35 assessment and not bother with any Status Disagreement process, out of fear of fighting HMRC or out of fear of upsetting a large, valuable client, Lord Forsyth remarked that it all smacked of “David versus Goliath, without the slingshot.”

Not all the peers were as sympathetic. Towards the end of the session, Lord Desai said: "Low-paid people definitely suffer from this unfairness...but high-paid people -- are getting away with murder."

The Labour peer subsequently apologised before being told by Lord Forsyth, who chairs the Economic Affairs Finance Bill Sub-committee: "I don't think we've had any evidence of that Lord Desai."