‘Heavy-handed’ HMRC cut PSC population in half with IR35 reform

The UK’s contractor PSC population has been more than cut in half by IR35 reform, with up to 200,000 contractors no longer limited.

New figures from HMRC, combined with those from an ex-Treasury adviser, revealed the Personal Service Company exodus last week.  

'150,000 moved from PSCs to payroll due to IR35 reform'

In a letter to an MP, HMRC’s deputy CEO said that up to 150,000 people “moved from PSCs on to payroll” as a result of the OPW rules.

But in her letter, HMRC’s Angela MacDonald also told Dame Meg Hillier MP that the 150,000 figure relates specifically to the 2021 Off-Payroll Working rules.

The separate, public sector rules of 2017 saw “at least” 50,000 additional people move from PSCs in the ensuing two years, MacDonald said.

When combined, then, (so across both private and public sectors), a total of up to 200,000 people moved from PSCs due to the OPW rules.

That represents growth since HMRC’s impact estimate of IR35 reform, as in December 2022, it estimated the private sector PSC exodus to be just 130,000.

So, either HMRC undershot the impact by 20,000 (it now says 150,000 private sector workers left PSCs), or 20,000 have exited PSCs in the last 15 months.

'Big numbers'

The margins matter because the total PSC population, pre- IR35 reform, wasn’t “big numbers,” says tax expert Rebecca Seeley Harris.

A former adviser to HMT, Seeley Harris says the number of people providing services via a PSC, pre-OPW, was in the region of 360,000.   

“I know the numbers very well because I was a senior policy adviser with the Office of Tax Simplification,” she began last week.

“There are approximately 4.5million self-employed but, the self-employed are not affected by IR35.

“It is only those providing their services through a limited company [who are affected by the IR35 /OPW rules].”

'Only about 360,000 people considered to be PSCs'

The boss of ReLegal Consulting, Seeley Harris continued: “[And] there are only about 360,000…[people] who are considered to be PSCs”.

Taking this 360,000 total and taking HMRC’s ‘200,000 exiting PSCs,’ it appears that IR35 reform has cut the PSC population by a hefty 55%.

The percentage cut in PSC population may be even larger based on this OTS report (from 2016), which states the total PSC population is 300,000, in which case the PSC population may have reduced by 67% due to OPW.

'Concerned'

Either way, the big dent in the UK’s stock of incorporated companies is related to why Dame Hillier and MacDonald were in correspondence.

As chair of the Public Accounts Committee (PAC), Hillier told MacDonald that the PAC is “concerned” about HMRC’s approach with IR35.

In a report last week, her committee shares its concern that the way HMRC is “tackling IR35” is “deterring legitimate economic activity.”

'Deterring companies from using contractors'

Further tying in with 55% fewer active, trading small companies in the UK, the PAC writes in its February 28th 2024 report: 

“We are concerned that a lack of confidence in how to apply the [OPW] rules, together with HMRC’s tough approach when taxpayers make mistakes, is deterring companies from using [PSC] contractors unnecessarily.”

In its 27-page report, a concerned PAC makes an official recommendation to HMRC.

The PAC recommends: “HMRC should assess the impact of HMRC’s approach to administering IR35 reform on the use of contractors in different sectors.”

'Destroyed livelihoods'

A digital transformation contractor in the finance sector has given his impact assessment already.

“Destroying the livelihoods of experienced and talented, law-abiding people [is the upshot of IR35 reform]”, the contractor reflected last week.

“[IR35 reform imposes] a system that suppresses the chances of [PSCs] securing paid work for hundreds of thousands of people… [with those companies no longer] contributing to the Exchequer.”

A former tax officer sympathises, saying she “wouldn’t want to guess” at how many individual contracts have got “stymied by IR35 reform.”

“It’s true many contractors did find a way [through IR35 reform], and have changed their client base or even their services,” added the former officer, Carolyn Walsh, now of Oblako Ltd.

'Impossible for some contractors'

“[But] where agencies are involved in the supply chain, it has proved impossible for some contractors to change anything or control the future success of their business.”

Recruiters aren’t celebrating the OPW rules, though, with one staffing firm owner last week saying he hopes the PAC report helps “galvanise change.”

“It's [not even] about complicated rules”, continued the owner, Lee Knowles of Adepto Technical Recruitment, taking to LinkedIn about IR35.

'Ironic'

“I think it's about risk. HMRC will never make the rules clear enough for hirers to make status determinations with 100% confidence - it's not in HMRC's interests to do so, because they know that many companies, particularly the corporates that are answerable to shareholders, are risk-averse, which means ‘inside IR35.’ 

“It's ironic that one of the primary characteristics of being in business on your own account is accepting risk. And yet this risk is being taken away -- and put where it's neither warranted nor welcome.”

Indirectly addressing agents or others fatigued by IR35 reform, Walsh advises against inserting sham substitution clause to try to move ‘inside IR35’ to ‘outside IR35.’

'The beat-the-taxman-brigade'

“HMRC will be wary of any changes that could be abused, such as the often ‘false’ substitution clauses that were included in every contract of service that used to be supplied to contractors by the beat-the-taxman brigade,” she says.

“A [better IR35 defence] that could [help] prove self-employment is evidence of a lack of mutuality of obligation”.

Reflecting on the PAC’s report, which also recommends HMRC adds up the number of active litigation cases for IR35 and the tax at stake, Qdos said the committee clearly thinks the taxman is being “heavy-handed” on OPW enforcement.

'Heavy-handed'

The IR35 contract review firm’s CEO Seb Maley said:

“Questions are…rightly being asked [by the MPs on the committee] about HMRC’s heavy-handed approach to IR35 compliance.

“[This approach] is putting off businesses from engaging genuine freelancers and contractors – at a great cost to these workers, the businesses themselves and the flexibility of the labour market.” 

Speaking without sight of Maley’s comments, Walsh used the exact same word to describe how HMRC comes across in the PAC report; “heavy-handed.”

But Walsh used “heavy-handed” in relation to the PAC’s other findings into HMRC; that the tax department:

• fell £2bn short of its £36bn target for compliance yield.
• managed to worsen “unacceptable” customer service of a year ago.
• made callers to HMRC helplines wait longer, increasing their ‘on hold’ time from approx. 12 to 16 minutes.
• uses the work of adopting digital services as an “excuse” to detract from its current customer service shortcomings.  

“Time for a rethink, perhaps?” asked Qdos’s Nicole Slowey in response to the PAC report.“[It’s needed most around] how HMRC goes about enforcing not only IR35 but also the off-payroll working rules.”