The draft legislation for Finance Bill 2018-19 has already been published ahead of the November Budget, and it includes no mention of IR35 reform within the private sector.
This does not necessarily mean that reform will not happen in April 2019, but it could be a sign that HMRC may appreciate that they have a bit more work to do before implementing further reform.
HMRC would already be behind on the tax timetable published last December which would require draft clauses to be released this summer for implementation in 2019; therefore suggesting a 2020 rollout instead. However, given that the reform is for all intents and purposes already done, a quick turnaround to get back in line with the timetable for 2019 isn’t completely out of the question.
Whilst HMRC are publicly stating that reform has worked, and in response to any criticism has stated that this is purely ‘anecdotal’ – a somewhat arrogant comment, particularly in light of the whole debacle with BBC pay highlighted in a Select Committee Meeting held in March this year – it is unlikely that HMRC predicted the devastating effects of the IR35 changes in the public sector with the likes of the BBC and NHS, so will hopefully be taking a bit more time to properly consider the impact of further reform.
HMRC must start to listen
In 2013 the House of Lords appointed the Select Committee on Personal Service Companies to consider the consequences of the use of personal service companies for tax. This was also at a time when the Office of Tax Simplification (OTS) was appointed to improve the administration of IR35, and the IR35 Forum (made up of external stakeholders and HMRC) was established to aid this process.
The Select Committee was appointed shortly after the introduction of the Business Entity Tests (BETs), which many may remember were designed to provide a low, medium, or high risk of being subject to an IR35 enquiry based on around 20 questions. The BETs were heavily criticised, much like HMRC’s CEST tool.
A great deal of resources were ploughed into making improvements regarding the IR35 legislation at that time, and the message seemed to be that the Government were going to finally pay some attention to the problems in administering the legislation.
John Whiting, the Tax Director of the OTS said in support of the IR35 Forum when speaking of the BETs:
“I think it is the responsibility of us all…to get the Revenue, the Treasury, business representatives and small business advisers working together – and I think that that remains the way forward on these tests. If advisers find problems with one or more of the tests, those ought to be fed in and discussed in the forum, and the tests ought to be refined.”
Whilst a positive sentiment, this view was not necessarily shared by HMRC themselves and a Forum member, David Ramsden from the FSB, expressed their dissatisfaction at their views not being properly considered by HMRC;
“I too sit on the forum, and I have to say that I get the distinct impression that the Forum is largely there as a box ticking exercise. It would not be if HMRC took any notice of what the external members of the Forum had to say.”
It seems that many Forum members felt that they were not being listened to, which is reminiscent of the recent criticisms over MOO being absent from the CEST tool.
The Business Entity Tests were eventually withdrawn by HMRC. Despite the time spent developing the tool, eventually it was used very little and was found not to be fulfilling its intended purpose.
HMRC have clearly not learnt from their previous mistakes. They are still choosing to ignore the consequences of IR35 reform in the public sector, or of the CEST tool, despite the fact that a mechanistic approach to determining employment status was attempted previously and failed, in addition to being widely criticised by both industry professionals and Judges in recent cases.
Cost of non-compliance
HMRC have indicated within their recent consultation document on IR35 that the costs of non-compliance in the private sector will reach £1.2 billion a year by 2022/23.
When the Select Committee were discussing HMRC’s administration of IR35, it is stated in the report published on 07 April 2014 that;
“It was also regrettable that HMRC were unable to provide precise costing for the current compliance and administrative work that directly relates to IR35…the overall practicality of the tax measure and the value for money that it delivers to the taxpayer needed to be further articulated by HMRC. Concrete figures of how much the IR35 rules cost to enforce and administer were not forthcoming; consequently, a cost benefit analysis of HMRC’s compliance activity could not be carried out.”
The irony of HMRC not being able to provide accurate costs relating to their compliance activity will not be lost by most. In comparison to HMRC’s estimated £1.2 billion, one wonders how much money HMRC have already wasted on their quest for a solution.