What HMRC's IR35 responses to the Public Accounts Committee really tell us about the taxman

For the uninitiated, the Public Accounts Committee has had some questions for HMRC of an IR35 and Off-Payroll Working nature, writes Danny Batey, senior consultant at Markel Tax.

These questions came about because the PAC said it was concerned that HMRC’s “approach to tackling IR35 is deterring legitimate economic activity.”

Questions, recommendations, and replies – of sorts

The committee recommended HMRC should: i) provide the number of active litigation cases for IR35 and the amount of tax at risk, and; ii) assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.

In answer to question one, HMRC opened with: “Employment status is usually straightforward to determine and uncontroversial” – and it concluded with “As at the end of March 2024, there were 26 active appeals….the tax under dispute totals approximately £13.6 million.”

In answer to the second question, HMRC’s response opened with “HMRC remains committed to understanding the impacts of the off-payroll working reforms” -- but then it didn’t really conclude with anything substantive.

Instead, HMRC just suggested they will gather more insights and they pointed out an optional question on CEST has been added, to help gather sector-specific information. (N.B. We will demystify that new CEST question, including saying whether contractors should answer it, in a future article for ContractorUK).

On the words alone, HMRC’s IR35 responses to PAC tells us diddly

So, what do the Revenue’s responses on IR35 and OPW actually mean for those affected by these frameworks? In my opinion, very little.

Neither response from HMRC addresses the PAC’s concern about deterring economic activity.

That said, the PAC recommendations themselves arguably did not pointedly address this concern either.

Out of touch

Examining HMRC’s responses, my overwhelming conclusion is that HMRC is very much out of touch with what is happening in the real world, and also at the day-to-day enquiry level.

HMRC stated in an additional response to the PAC: “Employment Status is usually straightforward to determine and uncontroversial.”

Well, the Off-Payroll Working legislation shifted the decision-making power to organisations and their staff, who have never had to make such decisions. These organisations (we now know from the huge OPW penalties which the public sector racked up) did not have the in-house expertise to make these ‘straightforward’ decisions properly.

We are now some three years into the OPW legislation and so you might think that organisations should have got themselves up to speed. However, we don’t see from our clients that employment status is “straightforward” at all.

If ‘straightforward’ in HMRC-speak means ‘complex,’ then the department is right

For many of our clients navigating contract wording and working practices reviews is complex, and the path to determining IR35 is mired with nuance, confusion and frustration.

Moreover, during the last few years we have seen the courts struggle with determining and defining Mutuality of Obligations -- one of the key fundamentals of employment status. It seems that even our country’s judges do not view the matter as “straightforward or uncontroversial.”

Though perhaps these are the small number of “complex” cases of which HMRC speaks? (See Chapter 4.7 in its responses to the PAC).

We see the taxman persisting on IR35 for many years, all of the time

HMRC, in its next breath, goes onto say that IR35 “disputes are costly…. [so] HMRC will not usually persist with a tax dispute unless it would secure the best practicable return”.

On the contrary, the department does persist. And for the taxpayers involved, these drawn out cases cost more than money.

Yet what is not included in this segment of HMRC’s response to the PAC is any accountability on HMRC’s part for the length of enquiries and costs attributable to their actions and inaction.

Where HMRC’s action/inaction on contractor IR35 enquiries beggars belief

As I write this piece for ContractorUK, my office has this morning received two questionnaires from HMRC on two separate Employment Status Enquiries. Both questionnaires are repetitive and contain questions that have already been answered. Further, in one case, the very same questions were answered two years ago.

Related, just recently for our advisory, I individually helped a contractor win an eight-year battle with HMRC over their IR35 status. In the case, HMRC, after pursuing the contractor for nearly a decade, had still somehow not concluded their “fact-finding” on the relevant engagements.

Time and time again with IR35, we are seeing increased HMRC delays, multiple changes of case-handler, and protective determinations which simply hold the taxpayer in limbo, with no apparent sense of urgency from the tax authority.

The perils of pinning everything on CEST

Back to the PAC.

HMRC’s final response to the MPs is that it “remains committed to understanding the impacts of the off-payroll working reforms.” It then cites research from 2022 and 2017 before speaking of the additional CEST question, saying it is designed to help gain insight into sectoral challenges.

While I appreciate the easiest (and most cost-effective) way for HMRC to garner information may be from CEST, there are a great many organisations -- contractors’ end-clients -- who do not use CEST whatsoever.

Like many other advisories in this space, we would always caution organisations against reliance on CEST, as the government’s tool itself assumes that organisations have read all the ESMs attached to it, and have thoroughly reviewed their written terms, in line with case law guidance.

Crucially, CEST’s ‘control’ question is one we see often completed with an answer akin to “Not relevant, it is highly-skilled work”.

There are occasions where this answer should apply, but HMRC and the courts would take exception to such an answer, rather than accept it as the norm -- and while HMRC do provide some explanation within the tool to help users, it does not provide sufficient clarity. And if CEST isn’t completed correctly, this undermines the whole decision-making process.

At the tail end of HMRC’s IR35 replies to the PAC, it looks like this…

So where does that leave us now? Well, I cannot help but feel underwhelmed by HMRC’s responses, though the cynic in me cannot say I am surprised!

The Revenue’s responses simply do not accord with the tangible struggles we see from our clients and while I appreciate the nature of work I do means I may see the more complex cases, I cannot believe that I exist in a bubble of challenging IR35 compliance issues which crop up in isolation to the rest of the country.

I would like to believe that the “commitment” by HMRC will translate to being more than just another empty promise from a government department. (N.B. The commitment being “HMRC remains committed to understanding the impacts of the off-payroll working reforms”).

We believe that for HMRC to live up to this commitment, it needs to clean up its own house and improve the speed with which it deals with enquiries; its internal processes and the taxpayer experience as a whole.

Papering over problematic OPW cracks is still ‘to-do,’ despite PAC’s ‘implemented’

The tax office also needs to do more than sound reliant on an optional CEST question. To understand the impact of the OPW rules, HMRC needs to engage with the organisations, gather information and listen to what is happening in the real world. While the new “offset” legislation effective since April 6th 2024 may pave the way for an increase in contractor numbers (and many advisories like ours hope it will), it does not paper over all the problematic cracks which the OPW framework has caused. On behalf of end-users we advise and the many contractors operating out there today, we wait with baited breath to see action from HMRC which accords with the still unaddressed problems, even if in the PAC’s report “implemented” implies they are no more.