National Audit Office is right to recognise IR35 as a mess, but it will get messier still for HMRC

The National Audit Office has published a good report, because it really confirms what it feels like almost everyone has been saying to HMRC for many years now on the IR35 front, writes Kate Cottrell of off-payroll rules advisory Bauer & Cottrell.

So like other organisations and inquiries before it, the NAO’s evidence is of a rushed legislation based on wholly inaccurate HMRC estimates (on the extent of the perceived problem); wholly inaccurate (implementation) cost predictions to public bodies, and a wholly ineffectual CEST, or at the least a CEST that’s still not good enough.

And the most concerning of all for contractors is that what HMRC actually charges is WRONG. It collects more than is due.

Come out with what works, HMRC, so UK contracting can comply

So far, seven public bodies have got IR35 wrong to the tune of £263million (in total) but none of the bodies will dispute HMRC’s findings and go to a tribunal or court even though HMRC usually loses. That’s a point of difference, I predict, with how the private sector will react.

For now though, the bigger picture is that five years down the line from the April 2017 introduction of the off-payroll rules, and it is only now being recommended that HMRC publishes what it thinks is good implementation practices. Those practices it has seen first-hand, and likes, from others.

It should be noted on page 39 of the NAO’s 60-page report that out of 59 investigation cases, HMRC did not pursue and closed 24 because they were “low risk of non-compliance”. Why? This information would be very helpful for all those affected, especially those individuals in the private sector tasked with assessing contractors’ IR35 status.

HMRC ‘may’ have underestimated the impact

To those also in the private sector, whose job it is to make status determinations and defend cases, HMRC’s process for estimating the costs of implementation gave us all a good laugh!

So thanks to the NAO illuminating HMRC’s processes (p48), HMRC envisages the cost of IR35 reform to organisations as being just half an hour to run CEST, an extra half-hour to deal with the “undetermined” results, and then somehow to not use any other tool and not consult any adviser!

Contrast that with an IR35 investigation. Be aware contractors, in an IR35 probe, HMRC asks potentially hundreds of questions, reviews reems of documents, attends meetings and writes copious notes. Oh and it can take a good TWO YEARS to do all this, investigate and come to a decision. At odds, is this hour-long click-about on the internet which is what HMRC totally inadequately estimated  - PER ORGANISATION – for IR35 reform compliance. Little wonder why the NAO says, HMRC "may" have underestimated the cost of implementing the reforms.

The troubling findings from the public sector are in the private sector, live, today

Further bear in mind that while we’re almost five years on from the 2017 roll out, sadly across our desk we still see the same IR35 issues, stinging contractors, agencies and end-clients, over and over again. To me, this repetition heavily highlights the many shortcomings in the revised IR35 legislation. And at about this stage, as we have from the NAO now, an organisation pops up to table the same sort of recommendations to get over the same sort of problems. 

Indeed, every issue mentioned in the NAO’s report reflects exactly the same problems that the private sector is experiencing -- right now. That’s together with the very real fear that they may have it wrong. 

Your mistakes, but the problems are of HMRC’s own making

Remember, HMRC expected ‘mistakes’ to be made in the public sector and no doubt expects the same errors in the private sector. The NAO is right to recognise that the private sector is very different, including being FOUR times bigger.

So HMRC is facing very serious problems in ensuring compliance. Many of these problems are of their own making, brought on by HMRC’s failure to believe the views of stakeholders before the April 2017 implementation, choosing instead -- wrongly -- to dismiss all the evidence as ‘hearsay’ – but it’s that same evidence which they now see before them in the National Audit Office’s welcome report.

Where next, as 2022 gets underway? Heading for a huge mess for HMRC, that’s where!

The sad irony for HMRC is that the off-payroll rules were introduced to make HMRC’s job easier – not messier. The thinking was that shifting the IR35 responsibility to end-clients, so HMRC can tackle one client at a time, rather than getting involved in time-consuming individual IR35 investigations, would be a lot less onerous. 

But without doubt there are numerous cases today where a contractor disagrees with the IR35 status determination or where a determination is just plain wrong. The NAO report states that the contractor can reclaim income tax, corporation tax, employer and employees NIC via the Self-Assessment system “after HMRC review.” (See the NAO’s Figure 13 in its report). 

At the time of writing though, we know of at least one case of this kind and it took the contractor 18 MONTHS to get his money back! Under the old rules of 2000, HMRC was in control of the number and type of IR35 cases it chose to investigate. But as things stand, the Revenue could be overwhelmed with “reviews”, which are simply investigations by another name.

And of course, the private sector is a totally different beast, as correctly acknowledged by the NAO. One key difference is that companies are unable to simply jot a note in their accounts about a potential financial liability running into the many millions of pounds! Also, the private sector is used to taking advice, insuring against risks, planning appropriately to maintain skills and identifying potential costs. So it will fight IR35 cases it can’t entertain, overlook or swallow the costs of through the courts. And this will create an exceptional, exceptional amount of work for HMRC. What a potentially huge mess to come for a government outfit that thought it was reducing its burden.

So bad that is it good for those who don’t want ‘small companies’ next?

With such a bad NAO scorecard for HMRC, it could actually be good news for PSCs currently supplying companies outside the medium and large criteria. Because looking at the NAO’s evidence, it is quite clear that the government would be quite mad to extend the new rules to small businesses. Well, at least not for 10 years, to see how the reform affects medium and large businesses. In the meantime, we all have to work with what we have and with the right advice and support, clients, agencies and contractors should have nothing to fear.