Unpacking HMRC's non-responsive IR35 reform response to the Lords: practical clues

The government’s response on July 15th to the report from the House of Lords Economic Affairs Finance Bill Sub-Committee on off-payroll working is yet another nail in the coffin of contracting as we know it, writes Rebecca Seeley Harris, founder of IR35 advisory Re Legal Consulting.

It is predictably dismissive of the Lords’ report but, that is no surprise. The government has been intent on bringing in the off-payroll reforms to the private sector in essence since IR35 was first conceived. The public sector reforms were just the testing ground.

So, the reality is that businesses need to focus on getting prepared for April 2021, if they haven’t already. So, going back to the government’s response, authored by both HMRC and HM Treasury, what is being done to help affected businesses prepare?

Education and support

The government noted the report’s conclusion that the requirement to determine a contractor’s employment status for tax imposes a burden on businesses, with support offered by HMRC ‘falling short of what is required.’ The Sub-Committee also expressed concern about the complexity of the ‘IR35 test’.

The government responded by saying that “in the vast majority of situations, employment status decisions are straightforward,” and claimed that the off payroll working rules do not change the longstanding employment status test.

The government did, however, agree with the Sub-Committee that organisations need help to prepare for the changes introduced by the reform. HMRC are apparently using the extra time afforded by the delay to evaluate feedback of the education and support package that has been offered during 2019/20. This will be used to inform the design of an enhanced programme of targeted support ahead of April 2021.

CEST

With regards to the CEST tool, the government disagrees with the Sub-Committee’s view that it is not fit for purpose and there was no mention in the government response of the glaring omission of ‘mutuality’.

The government instead reported that a significant amount of time and resources where invested in developing the CEST tool and the enhancements made in November 2019 were positively received by stakeholders.  Apparently, when CEST was compared to commercial tools it was found to give equivalent results.  However, we are pointed out that “no tool could be developed to cover every single judgement on employment status.”

As the result of a series of internal assessments looking at the operation of the tool’s underlying systems and improvements to its usability, the review found that “some customers experienced difficulties in understanding what steps to take if they received an ‘unable to determine’ outcome.”  As a result of this, HMRC are actively considering what more can be done to support customers, for example, through in-tool updates or guidance changes.  HMRC are also exploring a number of other changes to improve the usability of the service. Where possible, HMRC plans to engage stakeholders actively on any changes. Will contractors and straight-talking advisers be among those chosen to be engaged?

Blanket assessments, market impacts

The Sub-Committee also raised concerns about blanket determinations, with the concern that organisations will determine (and are determining in fact) all contractors to be ‘inside IR35’ regardless of their contractual and actual working arrangements.

The government acknowledges that ‘reasonable care’ must be taken when making status determinations and that blanket assessments do not constitute taking reasonable care.  Businesses are, however, entitled to decide how they structure their workforce, and we are further told, can ultimately decide not to use Personal Service Companies (PSCs) and that this does not constitute a ‘blanket assessment.’ 

I have no doubt that there will be people who fundamentally disagree with the government’s opinion of blanket assessments and I, for one, think that the government have made a very disingenuous distinction. Nevertheless, the government apparently does recognise concerns about the possibility of incorrect status determinations occurring, and when designing its future education offer, HMRC is now going to consider whether there is any additional support that can be offered to ensure organisations approach status assessments correctly. This is small but potentially significant development that contractors will likely welcome, and hope comes to fruition.

Final thoughts

As I have outlined before and leading up to April 2020, it is still possible to work with contractors outside of IR35 but, it does require effort and a fundamental shift in thinking of how a contractor is engaged. It is best to start planning now and not forgetting that, ultimately, it is the client who has to approve any status decisions, even though all parties in the chain still need educating. Whether that learning will be achieved from HMRC’s incoming education offering will also require a fundamental shift in approach, in terms of how it approaches and regards taxpayers. We can only hope.