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HMRC is incapable of implementing and policing the Off-Payroll (IR35) Reforms

A private sector extension of the Off-Payroll rules appears to be on the horizon, with HMRC’s IR35 consultation acting as a sales pitch for a wider rollout of the public sector rules. Astonishingly, this consultation was launched just one day on from the emergence of irrefutable proof that the taxman is incapable of policing the Off-Payroll rules.

The outcome in the Jensal Software Ltd v HMRC tribunal case was never in doubt. In fact, the judgment was so lopsided that experts are questioning why HMRC even went to tribunal in the first place.

You would have thought this would serve as a wake-up call to Government. When a public body trained on a specific item of legislation can’t even make a clear determination on employment status, how are contractor clients expected to make consistently accurate decisions?

HMRC’s ineptitude breeds false employment

HMRC must have expected to win, or else it would never have taken the case to tribunal in the first place. But, its defence was so riddled with misconceptions and flawed arguments that not even the expensive legal counsel – hired by HMRC and funded by the taxpayer – could save the day for the taxman.

And, if HMRC’s ‘experts’ can’t correctly identify IR35 status, what chance do contractor clients have of getting it right? The buck has already been passed in the public sector and hiring organisations, devoid of the necessary knowledge and resources to accurately assess contractors, are circumventing their compliance responsibilities by adopting blanket rules.

CEST: hirers may as well flip a coin over employment status

HMRC released Check Employment Status for Tax (CEST) to ease the compliance burden, but the tool serves no real purpose other than to act as a tangible representation of the taxman’s misunderstanding of IR35.

As the judgment showed, HMRC still can’t differentiate between mutuality of obligation (MOO) as applicable to contractors and the minimum obligation inherent in every commerical contract. Consequently, it was purposely omitted from CEST, rendering the tools analysis incomplete and invalid.

In the recent BBC court case, Jonathan Peacock QC, referred to a meeting in 2012 between Revenue officers and the BBC where a Mr Dixon from HMRC referred to employment status training: “Mr Dixon [from HMRC] is saying – he’s the specialist here – when he trains people, they will be competent after three years and might understand it after five.”

A university degree takes at least three years, and the complexity involved in employment status law warrants that timescale to learn. How can HMRC expect to teach 5.7 million small businesses how to assess employment status in a matter of months, or at all? It’s completely unrealistic.

HMRC maintains that CEST provides ‘certainty’, and it does, to the same extent that a coin flip would. But neither are an accurate way to determine status, and HMRC has admitted it has no evidence to prove its accuracy claims.

How will non-compliance in the private sector look?

While many contractors have abandoned projects in response to the inevitable non-compliance among hirers, those with less bargaining power have been forced into false employment and subject to excessive taxation as a result.

Despite all of this, the expansion of these rules into the private sector looks a genuine likelihood. Tasking all UK contractor clients with negotiating tax legislation that HMRC can’t even manage is only going to result in more non-compliance.

Whereas false employment has arisen in the public sector, the commercial landscape of the private sector would likely result in a different form of non-compliance. False self-employment will arise, whereby firms seek to gain a commercial edge over competitors by working to assess everyone as outside of IR35. This rids the firm of its employer’s NI liability and the requirement to potentially provide employment rights.

The proposals contradict the intentions of the Taylor Review and Good Work programme. Government must put the brakes on any rollout of the reforms to the private sector or else risk further damaging the rights of the most vulnerable workers.

Government risks further oppressing workers’ rights

IR35 is a toxic mess, which explains why HMRC wants to rid itself of it. If Government allows HMRC to impose this chaos on the private sector as well, it will lead to more non-compliance and oppression of workers who are unable to bargain.

Locum NHS nurses provide the perfect case study. Many have lost a third of their income due to the IR35 reforms – unless Government sees sense, the low paid in the private sector could be next in the firing line.

If the taxman can’t get a grip on IR35, how is the wider public supposed to? Government must call time on this failed experiment and stop applying sticking plasters to a broken machine. Change is needed from the ground up, with an overhaul of the tax system to align it with the modern way of working.

Published: Wednesday, 6 June 2018

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