Why Treasury minister Lucy Frazer’s reply to IR35-critical peers is so very uninspiring

Dated on the very last day that she was asked to respond by, financial secretary to the Treasury Lucy Frazer has written an official but uninspiring response to the scathing criticisms of the House of Lords’ follow-up inquiry into IR35 reform in the private sector, writes Seb Maley, CEO of Qdos.

The Lords issued IR35 criticisms on numerous fronts

From fears over the reliability of CEST to issues such as zero rights employment, the rise of tax avoidance schemes, blanket IR35 assessments and businesses banning contractors due to IR35 reform, Ms Frazer submitted her 11-page reply to this raft of concerns to the House of Lords Finance Bill Sub-Committee, which also made recommendations back in February.

In her March 9th response, the Treasury minister talks about how the government has communicated, and listened to those affected by the April 2021 off-payroll rules, and she speaks of HMRC “learning lessons” from the rollout of the public sector framework in 2017.

But does this narrative ring true? As many contractors, agencies and end-clients know all too well, this communicating, listening, learning taxman simply didn’t make an appearance in the run-up to either IR35 framework. And somewhat predictably, this sentiment and this not really reflecting the reality of what the contracting industry has endured since IR35 was revised last year (and in 2017), sets the tone for much of the minister’s reply.

Questions over CEST go unanswered

Firstly CEST. Due to all the problems it has created, the HMRC tool featured heavily in the Lords’ report. A key point raised was that HMRC must recognise CEST’s flaws and make clear to the party determining IR35 status that other methods are available to determine IR35 status.

In large part, Ms Frazer’s response refuses to acknowledge CEST’s drawbacks. She focuses on its simplicity – that it is “easy to use” – as a benefit. Now, this is fine if you can trust it to arrive at the right answer, but the reality is that CEST overlooks critical aspects of IR35 case law altogether, while relying far too heavily on other aspects.

The minister also explains that in the event of an IR35 investigation, HMRC will always examine working practices along with the contract. This is crucial, not just for contractors to be aware of, but also for end-user businesses to realise. The contract itself is key to initially determining status, but it is often the working practices that carry more weight in IR35 investigations.

IR35 helpline presented as a success

As the Lords rightly pointed out, CEST can’t deliver an answer in 20% of cases inputted. This has left hundreds of thousands of contractors (and businesses) in limbo regarding IR35 status and therefore IR35 compliance.

Frazer said HMRC has taken on board the fact that those handed an indeterminate answer need better signposting. But also in her response, she hits back at criticism regarding the support available for those left in the dark regarding IR35 status.

She claims that HMRC’s ‘IR35 Helpline’ had an average waiting call time of around 45 seconds, and that 98.6% of calls between March 2020 and November 2021 were answered. Impressive-sounding statistics perhaps, but no word from the minister on the quality or type of support being provided by HMRC.

No MoO? No problem (apparently)

The fact that CEST works off the basis the Mutuality of Obligation exists in every engagement – despite MoO regularly being found not to in tribunals – was addressed in her reply.

In line with the widely-criticised stance of HMRC, Frazer says “without MoO there can be no contract of any kind.” However, we know this not to be true, given that contractors often prove outside IR35 status in court – when it really matters – upon the premise that Mutuality didn’t exist.

The financial secretary to the Treasury did then say that CEST is “under continual review” and HMRC will work with stakeholders and the IR35 Forum to continue developing the tool. I doubt this represents a softening of HMRC’s stance on MoO, though. Unfortunately, it’s a rhetoric we’ve heard far too many times for that to be conceivable.

Banning contractors a ‘legitimate business decision’

In response to companies insisting that contractors work PAYE or have their contract cancelled, Frazer described it as a “legitimate business decision.” She’s not wrong, of course. After all, IR35 isn’t a consideration for employees – whether umbrella workers or permanent employees. But the fact of the matter is that banning PSCs outright is a needlessly risk-averse approach to managing – or ducking – IR35 reform. While I would have hoped the minister would have alluded to this, I’m not overly surprised that she hasn’t.

Blanket IR35 determinations

A major and adverse issue resulting from IR35 reform is blanket IR35 assessments, where a business places all contractors inside the legislation without ‘reasonable care.’ This was rightly highlighted in the Lords report, but Frazer’s response will have done little to convince contractors that the government is doing enough to prevent it occurring.

She said HMRC has started compliance activity and that as part of these checks, the way status determinations have been made by businesses will be scrutinised. This is great -- if and when the tax office investigates a business, but is it really enough of a deterrent to convince firms to stop this bad practice or even reverse blanket assessments already made?

HMRC to publish (yet more) research

Much has been made about the wider impact of the new IR35 off-payroll rules on the labour market. By this I mean the implications that the April 2021 reform has had not just on contractors, but also on the ways businesses are able to access the flexible skills they need.

The Lords highlighted this in their report. But Frazer pins some of the blame on the covid-19 pandemic, which has resulted in firms of all sizes and sectors facing major skills shortages.

There’s no denying that this has been the case to a degree, but IR35 reform has exacerbated the situation.

Like many others, I look forward to reading the HMRC-commissioned research into reform in the private sector, which the minister said she expects to be published this year.

No date set for umbrella regulation

It’s no secret that IR35 reform has been the cause of a proliferation of tax avoidance schemes – often posing as compliant umbrella companies – which lure in unsuspecting contractors. And this was another issue rightly made clear in the Lords’ report.

Frazer’s response offers little comfort. All she says is that “officials are working to build up a detailed and up to date understanding of the market.” And worse still, perhaps, despite being pushed for a date on the long-awaited umbrella industry regulation (in the form of the Single Enforcement Body), the Treasury minister declines to provide such certainty.

Government to address zero rights employment in ‘due course’

Taking the above into account, it was therefore no surprise that Lucy Frazer all but ducks another question put to her by the Lords – the injustice that is ‘zero rights employment.’

Zero rights employment occurs as a result of working inside IR35. The contractor pays tax as an employee but receives no employment rights in exchange. Yet again, we’re told by the minister to wait and see with regards to aligning employment status and tax status, with her saying more detail will be published in “due course”.

Same old, same old…

To round up, what does this Treasury minster’s response to the scathing House of Lords off-payroll inquiry tell us? In lots of ways, not a lot that we didn’t already know.

Unfortunately, it’s clear the government’s stance regarding IR35 has not changed, with Frazer picking up exactly where her predecessor, Jesse Norman, left off, who in turn picked up exactly where his predecessor, Mel Stride, left off.

Frazer’s uninspiring reply offers a similar rhetoric to many other responses issued by the government on areas where they are found seriously wanting. So, in large parts, it’s a communication that makes some of the right noises, promising to listen, learn, collaborate and improve. But as contractors and all their contractual partners from agencies and accountants to umbrellas and end-clients will attest, it is action that ultimately speaks louder than words.