IR35 – Is HMRC Ignoring the Problem?

CEST to be improved, but is HMRC ignoring the real problem?

There was some anticipation in the air earlier this month when the Office of Tax Simplification (OTS) – an HM Treasury unit independent of HMRC – revealed the measures it wants taken to help make IR35 reform work in the private sector. But when their report was published, it was hard not to think we were only being invited to look at the edges of the problem.

Adjustments to CEST recommended.

The OTS called on HMRC to improve CEST, the taxman’s controversial IR35 tool – which has been found wanting in the public sector. OTS recommendations included the need to use ‘plainer English’, ‘in-depth customer guidance’ and ‘pop-ups’ to assist end-clients when determining IR35 status.

These suggestions should be welcomed, but it’s hardly the redesign of the software that many IR35 specialists feel is needed. Minor adjustments, at best presentational improvements, in fact. And should HMRC implement them, it’s doubtful the tool will suddenly become capable of providing well-informed IR35 decisions.

Better than nothing, but not enough.

The inadequacy of this latest development adds to a growing sense of alarm among contractors about further IR35 changes, which are due to be introduced in April next year.

Survey after survey shows their rising level of concern about the ability of engagers and agencies to make the right decisions about their tax status. There’s a widespread belief that HMRC hasn’t learned from the difficulties experienced when introducing IR35 reform in the public sector two years ago and isn’t listening to the advice of experts.

Thousands of private sector companies remain unprepared for the responsibilities they will soon have in administering IR35. Recruitment agencies – who increasingly rely on temporary placements for their income – will also need to be ready. Should an engager determine IR35 incorrectly, in most cases the fee-payer (often the recruiter) will be held liable.

The big issue of national interest.

The very fact that the OTS was called in suggested HMRC might be under pressure to try harder this time to help taxpayers work within the new rules. The stated aim of the OTS – “reducing tax compliance burdens on both businesses and individual taxpayers” – might lead you to think so.

It was a move that could be interpreted as the Government finally understanding the potential for damage to contractors. Given IR35 reform could have such a negative effect on independent professionals – now proven as a key asset for economic growth – it’s crucially important that HMRC continues to work with all stakeholders to improve the legislation.

If, as a result of IR35 changes, the independent workforce is impaired, the resulting damage could feed through to the companies that rely on this skilled and flexible workforce.

The lesson of public sector failures.

How HMRC can ignore the experience of the public sector when enforcing further IR35 reform is a mystery, although not a great surprise. For the OTS to ask for limited improvements in the light of that painful experience is disappointing – especially at this stage in the game.

As a result of public sector changes introduced in 2017, several high profile organisations, including The NHS, made blanket-inside IR35 determinations. This left thousands of contractors inside IR35, meaning they pay tax at a similar rate to an employee, but do not receive employment benefits in return.

Reports say blanket IR35 decisions are still made regularly in the public sector, more than two years on. Unsurprisingly, as a result, many contractors looked for work in the private sector or increased their rates significantly to take into account the cost to them of operating inside IR35.

To repeat the same mistakes, possibly on a much greater scale in the private sector would be foolish. You suspect that making only minor refinements to CEST, however, isn’t enough to fix the problem.

Promises must be kept

Since further IR35 reform was announced in the Budget last October, HMRC has been in consultation with the stakeholders impacted by the changes. But time is running out. With so much at stake, not just for contractors, but for end-clients and the entire recruitment industry, small changes to HMRC’s controversial IR35 technology, does not really cut it.

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