The expected major impact of potential private sector reform meant there was no shortage of reaction to the Government’s IR35 consultation, which closed on 10th August.
In the lead up to the consultation close and in the days that followed, respected voices from contracting, recruitment and UK business publicly shared their thoughts on what would be hugely controversial IR35 changes.
These experts – each with their own interest in the prosperity of UK contracting – sent a clear message to the Government: do not extend IR35 reform to the private sector.
But is anyone listening? Many specialists believe HMRC will simply ignore the countless arguments against the roll-out of further changes, which in many cases are supported by data to show that public sector reform has not increased IR35 compliance.
Despite commendable lobbying efforts and a mountain of research to suggest extending reform would be a mistake, HMRC’s insistence that recent public sector changes have been a success could pave the way for the introduction of further reform.
Now, IR35 specialists, all too aware of HMRC’s unpredictable nature, have outlined a number of measures the Government should consider in the lead up to any announcement.
Align employment rights and tax status.
It is entirely logical and justified for contractors who are ‘employed for tax purposes’ to be offered employment rights. They are, after all, paying similar taxes to employees.
With 89% of contractors surveyed calling for employment rights when working inside IR35, the tax specialist has urged the Government to take this into consideration.
“In order to implement a fair tax system for those PSCs impacted, we believe that reform to IR35 should not go ahead, especially until such time as taxpayers rights are upheld in their entirety, giving them the employment rights which should be synonymous with the tax they pay.”
Issue ‘IR35 passports’
In Ernst & Young’s consultation response, they suggested the Government should look into developing an ‘IR35 passport’, in which contractors would have their status verified by specialists.
“Is there scope for contractors to obtain an ‘IR35 passport’, perhaps run by independently accredited providers, which allows engagers to rely on it to reduce the administration of individual IR35 assessments?”
Consider sectoral impact.
HMRC’s IR35 tool, CEST, is regularly criticised for its lack of relevance to specific roles and industries – a flaw which recruitment and employment confederation, REC, believes extends to the changes overall.
In response to the consultation, the professional body wants the Government to consider the specific needs of individual sectors.
“While the basic principles of any reform to IR35 needs to remain the same across the board, the Government needs to take account of the varying business models that exist across the economy and ensure businesses have sufficient time and resources to adapt.”
Allow contractors to keep control.
Public sector engagers are required to set IR35 status with ‘reasonable care’, something that FCSA thinks could be shifted to the contractor as an alternative to private sector reform. This ‘Enhanced Reporting and Enforcement Solution’, would mean contractors retain the right to set their own status, but with the responsibility to do so with an obligation of reasonable care.
“The proposal will serve to tighten up compliance by requiring end-hirers to secure their labour supply chains, and requiring the PSC, feepayer and intermediaries to share information up the supply chain. Information would be reported quarterly to HMRC, and the resulting intelligence would enable HMRC to undertake targeted, risk-based compliance and enforcement activity.”
Make SMEs and micro businesses exempt.
To this day, public sector engagers the size of The NHS struggle to make accurate IR35 decisions. So what makes the Government think micro businesses or SMEs in the private sector will be in a position to do so? To protect millions of private sector companies and contractors from inaccurate IR35 assessments, IPSE has floated the idea of making these businesses exempt.
“The Government may want to consider exempting businesses that meet the SME definition, as a way to ensure that smaller businesses will not be disproportionately affected.”
Measure public sector changes.
The Government believes that a greater number of contractors working inside IR35 means public sector reform has been a success. But The Chartered Institute of Taxation (CIOT) says it’s impossible to tell at this stage, given changes were enforced in April 2017, and the majority of self-assessment tax returns for 2017/18 are yet to be filed – the deadline being 31st January 2019.
“They should conduct further research into the effects of the public-sector reform, once a full SA cycle has been completed, before considering extending this reform to the private sector.”
Improve HMRC infrastructure.
Many IR35 experts felt the Government did not give public sector engagers enough time to prepare for reform, nor the guidance they needed. Should private sector reform materialise, CIPD – the professional body for HR, expects HMRC to improve its existing infrastructure so it could educate and support engagers second time around.
“This will require a significant level of investment by HMRC with the provision of information, support and guidance for HR and payroll professionals, backed up by the creation of a communications and marketing strategy and the roll out of an extensive campaign which we would expect to include a range of interactive webinars that support a wide range of learning needs and styles, from the novice through to the subject specialist.”
Address CEST now.
Collectively, IR35 specialists have called for an overhaul of CEST. The tool has been used over 750,000 times since it was released just before public sector reform and it could be central to millions of future IR35 assessments, given HMRC’s insistence to stand by the results it provides.
With this in mind, the Association of Accounting Technicians (AAT) is one of the many experts urging the Government to address the tool’s flaws.
“HMRC acknowledges that this tool fails to reach a reliable conclusion 15% of the time. Indeed, HMRC has stated that CEST fails to cover all scenarios, including the Mutuality of Obligations (MOO) master and servant test. This is simply unacceptable.”
Until the Government publishes its findings from the consultation, private sector changes hang in the balance. However, the sheer volume of responses from various parties in the supply chain demonstrates that should HMRC extend reform, it would be against the wishes and best-advice of this entire sector.