IR35 change is still going to happen, and there is no doubt that contractors will be affected – the only question is when and how. But the good news is that if HMRC are behind the changes, they’ll almost certainly be a workaround.
In the Autumn Statement 2015, neither the Chancellor George Osborne’s speech to the Commons nor the ‘blue book’ make any mention of the reform that looked so certain only weeks before.
We’ve been part of the IR35 story for over fifteen years, attended many roundtables and consultations with the Treasury, Office of Tax Simplification and with HMRC itself, so we know that HMRC wants to do something, as their policy teams have told us often enough.
This is because HMRC has the magic number in its collective consciousness of £430m of tax lost as a result of IR35 avoidance, and £520m being generated as a result of the IR35 deterrence effect.
To be more precise, HMRC’s ministerial overlords have probably latched onto IR35 being worth £950m. If you squint, it almost looks like a billion a year, and that is a serious wedge which would buy a decent chunk of a new Trident Successor submarine, or about three new hospitals.
Plus there will be an outcome from the taxman’s Intermediaries Legislation (IR35) discussion document that attracted an impressive 160 contributions. HMRC is even firing-up the IR35 Forum again, which is a mixed blessing, given its track record.
Change is coming because IR35 is not like the settlements legislation, which was shelved after an incredible backlash from the business community and the media.
There are not enough votes in the contracting sector to care particularly what it thinks, despite the backlash of recent weeks, and the media is incredibly ill-informed about the facts around contingent working, so repeatedly and wrongly depicts contractors as tax dodgers.
Now, in its discussion document, HMRC asked for comments on specific policy proposals rather than for more general responses. This is significant, because this means that HMRC has pretty much made up its mind about what to do, and is looking to contracting’s stakeholders to highlight areas of weakness in the policy proposals that it can fix so IR35 works.
We also know, because the IR35 policy team told us, that HMRC does not want to create and implement a new IR35 regime that will impose “a disproportionate burden on business”.
How this squares with making clients responsible for compliance – which is a core proposal in the discussion document and in the leaked pre-Autumn Statement policy documents - is an interesting conundrum.
It also underlines HMRC’s enduring search for a Holy Grail solution to employment status. This Holy Grail of finding a dividing line between employment and self-employment has eluded the finest legal minds of not just the UK, but most other common law countries.
The answer is that there is no line. Employment status is not black or white, it is a continuum. No amount of tinkering with employment tests to introduce supervision, direction and control (SDC), or forcing contractors onto the payroll after a single month with a client, is going to satisfy HMRC without crippling the economy.
Clients don’t hire expensive experts like contractors and then tell them what to do, so control tests don’t work. And putting these experts only needed for three months in 12 onto the payroll is uneconomic. Even if you do take them onto the payroll, they then pay less tax overall than when they were contractors.
The only way the taxman can be proportionate is to only target blatant disguised employees who are heavily controlled. But this demographic tends to be lower paid, so won’t lead to anything like the near billion pounds in tax revenues ministers have been promised and so are expecting from IR35. And so we come full circle.
In reality, what’s likely to happen is that we will see a consultation document published by HMRC just before Christmas, or in early January 2016. The deadline will be impossibly short, not more than four to six weeks.
The consultation will detail HMRC’s view of how IR35 should be enforced, and probably include elements of a new online test based on SDC, a time limit and clients being partially responsible for compliance, so quite similar in principle to the Off-Payroll Rules in place in the public sector and those recently leaked.
But it will be a done deal. HMRC is notorious for paying lip service to the consultation process and responses. Once the taxman has decided that something shall be done, then it generally is.
The impact on contractors? Well, if you target a bunch of the brightest and most motivated small businesses and entrepreneurs with an unfair and unjust tax that tackles a problem that no longer exists, then you’ll reap what you sow.
We’ll get around it somehow, IR35 yields will remain stubbornly non-existent and that will be that, until the next time.