HMRC and IR35

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Flexible working in the public sector is in crisis, stemming from the ill-conceived IR35 reforms. Now, the narrative is preparing to take an even darker turn, as widespread non-compliance with the rules looks set to result in thousands of costly legal challenges and tax reclaims.

Though HMRC has continuously hailed the success of its public sector reforms, a new study by the Freelancer and Contractor Services Association (FCSA) shows that half of public sector bodies haven’t even assessed the IR35 status of their contractors.

The FCSA’s research adds to the ever-growing body of evidence that the public sector IR35 rules in their current format simply aren’t fit for purpose. It also confirms an emerging threat to public sector bodies (PSBs),

Half of public sector hirers aren’t assessing IR35

FCSA found that 50% of survey respondents hadn’t conducted IR35 assessments for contractors sourced via agencies. Instead, 42% simply deemed their contractors to be caught by IR35, while 8% granted their contractors outside IR35 contracts without an assessment.

It goes to show that when HMRC claims the reforms have increased IR35 compliance in the public sector, the only metric being used is the amount of tax going into Government coffers. Certainly in this case, an increase in tax does not mean an increase in compliance.

Why are blanket rules so rife?

Of those surveyed, 26% of respondents adopted a role-based approach when assessing contractors, meaning that a mere 24% of PSBs are carrying out individual assessments, as required by the law. FCSA notes that HMRC’s Check Employment Status for Tax (CEST) tool is rarely used exclusively by PSBs.

The lack of trust in CEST is unsurprising.  An analysis of CEST found that it returned numerous inaccurate results when tested against the historic IR35 tribunal cases. This is in some part due to the fact that mutuality of obligation (MOO) – a key test of employment – is deliberately omitted from CEST, as was revealed in October 2017.

HMRC’s inability to substantiate its claims regarding CEST’s accuracy with detailed proof will have done little to ease concerns, as blanket assessments become increasingly viewed as a less risky alternative. As a result, rather than assisting compliance, CEST and its many shortcomings are effectively stoking non-compliance in the public sector.

Contractors poised to litigate

But whereas HMRC has been happy to disregard evidence of blanket assessments, and the resulting strain placed on contractors, projects and the public sector, perhaps it will pay attention to a new and emerging threat.

According to FCSA, 36% of respondents are concerned that legal challenges will arise from the wholesale approach to IR35 that many PSBs have adopted. These findings give credence to the warnings issued in recent months.

It has been highlighted time and again that contractors won’t accept unjust tax hikes lying down. Now, after a year of unjust tax treatment, the backlash looks set to begin, compounding an already backlogged employment tribunal system.

Hirers face an impossible task

You could argue that, to a degree, the impending legal action is somewhat harsh on the affected PSBs. From the offset, they were faced with an almost impossible task of accurately assessing entire contingent workforces, while simultaneously wrestling with the threat of HMRC action for every instance where a contractor is deemed to be outside of IR35.

Asking hirers to assess IR35 status on a case-by-case basis was always a non-starter. Many hirers simply don’t have the capacity to meet these demands, which helps explain why we have seen evidence of blanket approaches being adopted by the likes of the NHS and the Ministry of Defence (MoD), and on major projects such as HS2.

What’s next for HMRC and IR35?

Given the current state of affairs, it beggars belief that a private sector rollout is on the cards. A roll back, followed by a wholesale rethink of the legislation, is what is required.

Hirers cannot be required to assess IR35 status. Even if CEST did work, it couldn’t in its current structure solve the problems created by IR35. Extending legislation which paves the way for an endless cycle of legal challenges simply isn’t an option, neither is it a solution which can be patched up.

Staying true to form, the publication of HMRC’s independent research and consultation on IR35 has been postponed. We have to ask why. The Deloitte report into the BBC’s activity many years ago was referenced in the recent Select Commons Committee as an attempt at “sparing the blushes of the BBC”.

The firm tasked with producing this independent report will have its work cut out here, if it is to do the same for HMRC while retaining credibility for itself. Portraying the IR35 reforms as anything other than utter chaos would be like war journalists standing in a battlefield claiming no-one’s been hurt. Still, as long as HMRC is involved, it’s never outside the realms of possibility.


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