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Contractors need to lobby their MPs to avoid impending IR35 disaster

HMRC is ignoring all the experts and proceeding with its efforts to do the impossible by developing an online tool that it thinks will replicate the decisions of judges in IR35 cases.

I am not alone claiming that this effort will fail – but it will also cost contractors and agencies a great deal of worry, hassle – and money.

The only hope you have as a contractor now is to fight back, by lobbying your MP before the Autumn Statement in November or early December 2016.

HMRC cannot perform miracles with any new IR35 tool

At a recent compliance seminar by PRISM, representatives from HMRC strongly suggested that its planned IR35 tool will be able to deliver the same outcome that case law judges would issue in court. It’s nice to see the taxman is confident, and the objective is admirable, and one that everyone would like to see achieved – but alas, it’s not possible as we have pointed out many times before. A simple binary in/out judgement on all IR35 status cases cannot be derived from a mere questionnaire.

I can say this with confidence, because we spent a year building a tool of our own, and discovered that it isn’t possible achieve a definitive in/out result. ContractorCalculator’s IR35 test has been used over 95,000 times since we introduced it seven years ago. Of those users, roughly a quarter are deemed to be a certain pass, whilst only 28% are considered to have definitely failed.

This leaves almost half of contractors who are borderline pass, borderline fail or in the borderline/don’t know zone. The best that can be achieved is to place contractors somewhere along a spectrum.

Things should be no different for HMRC.

To give a binary in/out result HMRC will need to draw a line somewhere along the spectrum to separate those inside IR35 from those outside. Knowing that the taxman doesn’t like the idea of anyone “getting away with it”, the chances are that this line will be drawn far too much inside the definite pass zone, and therefore wrongly assessing that many contractors should pay thousands of pounds more in tax each year than the actual law dictates - a potential situation being described as “false employment”.

Contractors are in danger of HMRC adopting a ‘not in means out’ mentality. What you end up with is false employment.

What do the IR35 experts think?

The view that a tool to provide a binary result is unachieveable has been reinforced by multiple experts. Kate Cottrell – who wrote the Office of Tax Simplification’s IR35 review and is a founding member of the HMRC IR35 Forum – said that if a binary tool could have been created, it would have been 17 years ago.

And that is what is most concerning. The fact that after 17 years of struggling to come to terms with its own legislation, HMRC suddenly believes that it can develop the solution in the form of a simple online tool developed in only a few months.

It takes years of specialist legal professionals to understand employment case law - it can’t simply be condensed down to a basic questionnaire and to reach a definitive conclusion. In the taxman’s eyes, decades of case law and years of knowledge and expertise of employment status judges can be easily replaced by a few clicks of a mouse – automated judges if you will. It’s ludicrous, and the expectation is that the tool will quickly be ignored by all stakeholders, thus failing to achieve the objective of pushing HMRC’s IR35 enforcement duties onto the hirers of contractors.

What should contractors do?

I would urge you to start by lobbying your MP, as it is only MPs that will be able to push back on this unworkable piece of potential legislation. Even if you do not work in the public sector, it is expected that the roll out of these new rules will hit the private sector the following year.

Public sector contractors need to start thinking about their IR35 status now, because hirers will want to ensure from April 2017 that they are compliant. Start by using our online IR35 tool.

Published: 28 July 2016

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