Why HMRC’s short-term IR35 effects research should come with a health warning

It feels negative to start the New Year off with the following health warning about HMRC’s new report into the impact of the IR35 off-payroll rules, but it’s important to remember when reading the report that it contains a mass of questionable statistics and unrepresentative samples, writes Alex Seal, tax consultant at Markel Tax.

Be aware, there were only 353 medium and large-sized businesses selected to take part in the HMRC-commissioned telephone survey. That represents not even 0.6 per cent of the 60,000 businesses which HMRC has estimated would be affected by the IR35 reforms of April 6th 2021. And an inconsequential batch of only 39 organisations participated in follow-up interviews.

A corporate report by HMRC which founders…

While HMRC can only report on data actually collected, the report does seem to founder heavily on a significant lack of relevant information. So it feels like the statistics which are included, have been used to spin a good story.

For example, much appears to be made by HMRC in its write-up of IFF Research’s findings of the 50% (group level) and 48% (establishment level) who found the IR35 reforms easy to implement. But that means over half did not find the department’s framework easy to implement!

Implausible, and alarming

Implementation costs of as little as £1,000 seems implausible, despite 35 per cent of group-level organisations and 25 per cent of establishments apparently falling into this category. Surely, though, this outlay of between £1.00 and £999.00 as a “one-off” caused by the IR35 reforms cannot take into account the evident increase in day rates to compensate contractors for loss of earnings. (N.B this practice is cited in the report but is underplayed) And what about monthly administration costs; and the cost of taking on contractors into staff roles?

With this research, HMRC seems to be positioning itself to highlight that the majority of end-clients are using CEST – his soon-to-be-updated tool. But if only half of clients found implementation “easy,” why did the other half not? We find this quite alarming as in our experience, on too many occasions CEST produces indeterminate results and so cannot be relied upon for the robust and accurate determinations that businesses need to meet their legislative obligations.

£1.8billion, the unsubstantiated yield from IR35 reform

Something else the taxman is keen to highlight, mentioning it three times in his report, is the amount of additional tax revenue generated by the off-payroll rules -- £1.8billion.

But this figure is difficult to reconcile; there is a distinct lack of clarity as to how this yield was “estimated” and no comment is offered by HMRC, or its researcher, on the cost of the now distorted contractor marketplace. Also conspicuously absent is the cost of umbrella contracting which increased significantly as a direct result of the IR35 reforms.

Cause & effect -- and caution

Elsewhere in the report but sticking with the theme of cause and effect, while we cannot downplay the impact of covid-19 on the economy, it is a little too convenient to lay the decline in PSC engagement at the feet of a global pandemic. The migration in the UK from personal service company (PSC) usage to umbrella company usage was not borne out of anything other than IR35 being changed.

The more one reads this report and adjoining research the more it comes across as though it has been created as a pat on the back for HMRC. Despite the potentially illuminating title ‘Short-term effects of the 2021 off-payroll working rules’, this research provides little of value to the wider affected population – other than perhaps to serve as a reminder that HMRC are very much confident about their approach to the reforms and will seek to police the legislation.