With its contract staff, HMRC is failing to lead by example on IR35

A prime candidate for your bedtime reading as a contractor, HMRC has published its annual accounts for 2022/23, covering April 1st 2022 to March 31st 2023.

In the accounts, alongside things like its “values,” (‘We are professional; we act with integrity; we show respect; we are innovative’) is HMRC’s tax take for the year. Some £814billion is the headline figure.

But scratch beneath the surface of this 344-page document and HMRC reveals its approach to engaging contractors. Or, more accurately, not engaging contractors, writes Seb Maley, CEO of Qdos.

Counter-productive approach underscored in annual accounts

Throughout 2022/23, HM Revenue &Customs engaged a total of 980 contractors earning £245 a day or more. But not a single one was directly engaged outside IR35.

While the vast majority were “not subject to off-payroll legislation”, they were likely operating through an umbrella company or employment agency -- effectively meaning IR35 is not a consideration. To me, an IR35 contract reviewer, it begs the question, how many of these contractors wanted to work in this way?

As the creators and enforcers of the off-payroll working rules, the tax office is hardly leading by example. Instead of demonstrating to other organisations that contractors can, in fact, be engaged compliantly outside of IR35, HMRC has adopted the most risk-averse position possible. Not exactly “innovative.”

It underscores the tax office’s counter-productive approach to IR35. True, there may be instances of HMRC working with contractors via consultancies, who have been deemed outside the clutches of the IR35 legislation. But in such a scenario, the perceived risk lies with the consultancy, rather than the end-client.

Increased use of temporary workers at odds with IR35 approach

Despite all of this, HMRC has also disclosed that it plans to engage an average of 1,630 additional temporary staff each month between April and September 2023.

The move by HMRC to import temps is an attempt to improve its customer call-wait times which have tripled since 2018/19. Five years ago, a call to the taxman would have been answered in a little over five minutes. The average for the previous financial year was 16.5 minutes. Clearly, HMRC service levels have slipped.

Regardless, unfortunately two of the Revenue’s customer helplines -- the Self-Assessment helpline and VAT registration helpline -- have been closed to taxpayers. The former is closed “on a temporary three-month basis” and the latter “indefinitely”.

A deeply ironic staffing approach from HMRC

Available online, the annual accounts also note that HMRC cut its customer service staff headcount by 834 across 2022/23 (the equivalent of a 5% reduction). And now it’s hiring roughly double that number -- albeit at arms’ length -- to meet demand.

There’s a deep irony in this approach. It’s fine to engage one type of flexible worker, apparently, while outright refusing altogether to engage another set -- unless on HMRC’s terms.

The inconsistency of this approach is almost laughable. Or, it would be, if it wasn’t about livelihoods and careers. Instead, it’s alarming.

The private sector’s lesson for the tax office

HMRC’s approach is not the only way. But perhaps it shouldn’t be surprising.

We know -- from both our personal experience and professional dealings -- that HMRC isn’t always flexible. And while the tax authority is demonstrating how not to go about managing the off-payroll rules, the good news is that more businesses are getting to grips with them.

After a few years of adjusting to new requirements, many private sector organisations are now what I’d describe as confident in engaging contractors outside of IR35. In our own annual survey, released earlier this year, as many as 80% of contractors had secured contracts outside the scope of the rules.

Lastly, keep up at the back…

So unfortunately on its own legislation, HMRC is lagging behind. But many more firms than pre-2022 are now capable of taking a fair and measured approach to IR35 and IR35 reform. The approach of these organisations is a template for correctly managing the off-payroll rules -- one that HMRC would be wise to take note of.