Like the defeat of the IR35 amendment, HMRC’s attitude to contractors is disappointing

As most contractors will be aware, the government has come in for criticism following its rejection of a tabled Finance Bill amendment calling for private sector IR35 off-payroll legislation to be delayed.

This rejection is very disappointing, especially given that HMRC’s attitude to contractors shows no sign of changing either and given that HMRC is scheduled to enforce the legislation from April 2021, writes Jacqui Mann an employment tax specialist at Markel Tax.

‘The sickly child who’s never got any better’

The IR35 legislation has been regularly and widely criticised since its inception. Twenty years on, that criticism has only increased as various attempts have been made to make this anti-avoidance legislation ‘work’ which has only served to compound the matter. 

Instead of those attempts helping, the legislation has simply become even more convoluted, as the fundamental underlying issues on how labour is taxed in the 21st century remains unresolved. 

The recent House of Lords review, which roundly criticised the legislation (“flawed”), was the latest hope for a wholesale review.  This would have been the right result, but the government has defeated a proposed Finance Bill amendment to delay IR35 reform any further (and a delay was among the Lords’ many sensible but ignored recommendations).

Consistency

This result is consistent with my dealings with HMRC, on behalf of clients under the IR35 spotlight, where sadly case law and HMRC opinions do not often converge. 

In the past two to three years, HMRC’s stance has noticeably become even more entrenched, with the further widening of the chasm between HMRC’s view and the case law, on which the status tests that determine IR35 outcomes, should rest. 

There is no better example of this divide than in the recent Upper Tribunal decision in the case of Professional Game Match Officials Ltd (PGMOL) v HMRC, in which Mutuality of Obligation (MoO) was in-point. HMRC has repeatedly and consistently brushed aside the importance of the issue of MoO as a pre-requisite necessary for a contract of service to exist. HMRC has long taken a view on this matter which is at odds with the clear intention of the original test, as laid down in the Ready Mixed Concrete case of 1968; instead it has attempted to render the test of little use, by suggesting that the mere fact that a piece of work is undertaken and paid for is sufficient to meet the test for mutuality. 

Courts can’t seem to get through to HMRC -- some 14 years on

Once again, HMRC has been told that this is at odds with case law, but despite the fact that the Upper Tribunal gave very detailed consideration to this area in PGMOL, HMRC has stated that it intends to appeal to the Court of Appeal, rather than accept the decision.

If any further proof of HMRC’s unreasonable position in this regard was required, the judges’ comments in the PGMOL case should be enough. In their decision Zacaroli J and Judge Thomas Scott stated:

“We consider that HMRC’s real complaint is that it disagrees with the conclusion the FTT reached.” 

This echoes comments made by the Judge in the 2006 FTT decision of MAL Scaffolding v HMRC:

“The (HMRC) appear to have approached their investigations on the basis that there must be an employment relationship between MAL Scaffolding and the workers there if one looks hard enough. Officers then went looking on that basis and persuaded themselves that they had found that for which they went looking. They have totally failed to persuade me.”

These two comments – 14 years apart, show that HMRC’s stance and their approach has not changed in that time.

Attitude, threats, selectivity

HMRC has a very intimidating and inequitable attitude in relation to IR35 reviews and in one of my recent cases (which is poised to go before the FTT following a statutory review which failed to overturn HMRC’s ‘caught’ decision), HMRC sent a very strongly-worded letter. The letter stated that “should my client persist in contesting this issue at Tribunal” they should be aware of various factors, which included citing their most recent wins at the FTT in relation to IR35. 

These decisions at the FTT do not set a legal precedent, but despite this, HMRC went so far as to say they were directly relevant to my client’s case, but at the same time ignored the raft of cases that they had lost, which may be relevant to the case. This behaviour is typical of HMRC’s approach to FTT decisions; they will present them as precedents where it suits their argument, but reject the principles where they do not, on the basis that ‘the facts are different.’

I have since challenged HMRC to explain why the binding UT decision in PGMOL does not apply, only to be told by HMRC that they do not think that it is relevant. Of course, we do not accept this, but the problem is that HMRC can and do get away with this approach, knowing that it is for the client to initiate formal action and having to consider the potential costs of doing so.

No deterrent and, it seems, no deviation

In a more general sense, it is wrong that in order to receive the correct treatment under law, taxpayers are forced as individuals to enter into a litigious process, against the might of a government department with very deep pockets, who instead of acting as the unbiased custodians of the law, appear to be operating a policy decision which seeks to ignore jurisprudence. The only consequence for HMRC of pursuing cases that they should clearly have conceded, is the risk of being the target of the terse words of the judges in their published decisions, which is clearly no deterrent.

It is very obvious that HMRC has been tasked with taking an increasingly robust approach in relation to IR35, at all costs. The government is clearly determined in its approach to continue with the off-payroll reforms in the private sector and I see little chance of this changing anytime soon.

The suggestion by the government of some research being carried out after the new IR35 rules come into force in April 2021 is welcome. But I fear the suggestion lacks sincerity, so I am not optimistic. The government appears to be on a set path and nothing, it seems, will deter it. However the result provided in the PGMOL case, and the potential ramifications of this, not least in relation to HMRC’s CEST, are going to be difficult for HMRC to ignore.  It will be interesting to see how this situation evolves.

The covid paradox

The bigger picture is hard to frame as anything else but that the government’s stance on IR35 is outdated. More than ever, given the economy is faltering under a pandemic, there is a need for a professional, highly-skilled, self-motivated workforce who can undertake specific and specialist tasks that cannot be fulfilled by existing staff within businesses.

Indeed, it is likely that at this particular point in time, due to the unforeseen circumstances we find ourselves in as a result of COVID-19, that organisations, perhaps even HMRC themselves, will be in a position where they need to seek the assistance of specialist outside contractors to deliver services that:

a) could not have possibly been predicted and are outside of ‘business as usual;’ and

b) they do not have the in-house skill-sets to perform. 

These two circumstances speak to the very nature of the contractor marketplace; its workers  are agile, possess a raft of highly bespoke skills and can be called upon to perform specialist services within a finite timescale. It is frustrating that HMRC’s application of the IR35 legislation has vilified those operating in this market, paradoxically at a time when we desperately need to encourage niche, nimble businesses, and specialist skills. 

Clear risk

So it is also further unfair that the view that contractors are all tax avoiders has been allowed to take hold, when this is far from the truth (even HMRC’s own study has busted the myth that they’re all in it for the tax saving). The government’s other unfounded view that most contractors are akin to employees of the businesses they provide services to, is similarly far and wide of the mark. The truth is contractors have no employment rights whatsoever and can be dispensed with all too easily. Contractors have very little security and usually take on all of the risks in undertaking those services. However, the IR35 legislation is so complex and nuanced that it is only too easy to persuade the public at large that operating through a company is a terrible wrong that needs to be righted, and there is a clear risk that HMRC’s view will be taken as the definitive analysis by the general public.