Are HMRC one step closer to rolling out the IR35 reforms?

A few weeks ago we ContractorCalculator described the steps we thought would happen to pave the way for HMRC to roll out the IR35 Reforms to the entire contracting sector - both public and private. As the IR35 Forum minutes demonstrate we are now a step closer.

We predicted the following initial steps to roll out:

  1. HMRC roll out IR35 reforms to public sector. [Done]
  2. Contractors jump ship, some rates go up - Government picks up the extra tax tab in some cases. [Done]
  3. HMRC starts calling all contractors "off payroll". [Done]
  4. HMRC renames IR35 as "off payroll in the private sector". [Done]
  5. HMRC denies that IR35 reforms had any impact on the public sector [Done]

Proof of step #5 recently happened as HMRC completely denied the conclusive facts delivered in our comprehensive IR35 Survey. And this week we saw in the IR35 Forum minutes, from July 2017, more denials that there were damaging effects from the reforms.

The latest IR35 Forum minutes

The salient points from the IR35 July 2017 minutes were:

“HMRC has seen no evidence of significant impact on attrition rates of contractors working in the public sector.”

“HMRC was not aware of any significant movement in contractor rates.”

And despite the widespread commentary from the market that the HMRC IR35 Tool (originally called ESS and renamed to CEST) is not fit-for-purpose the minutes reveal that:

“No further changes to CEST are envisaged at this time.”

“When the tool is updated the previous results remain valid and there is no need to re-run CEST.”

This is rather horrifying, and an example of HMRC acting ultra vires and effectively trying to define and police the rules for employment status themselves. Employment status is not defined by their test and is not a moving target – so if they change their tool everyone who is relying on it would absolutely have to be retested.

The minutes also reveal that there had been “no IR35 tribunal cases since September 2011”, but confirmed that there are cases that are likely to be litigated in the near future - enforcement is apparently still happening.

As for HMRC’s opinion on whether the reforms will be rolled out to the private sector, you may recall they previously said that there were no plans to do so and that they considered the private sector to be an entirely different beast to the public sector. Here’s what they say now:

”HMRC explained that the current focus is on embedding the recent reform, and that it was not possible to comment on the plans of the new administration. However, we do of course want to see compliance improve in the private sector.”

Time to sound the alarm bell anyone?!

At ContractorCalculator we, like others, think it is a matter of when, not if, and we have spelt out our thoughts here:

What's next?

So, to continue our crystal ball exercise, here’s what we consider coming your way:

  1. HMRC provides 'proof' of extra tax receipts.
  2. HMRC convinces MPs they can capture the c£600m they've been chasing for years by "aligning the rules".
  3. Roll out to private sector goes in Finance Bill 2018 (or 2019).
  4. Private sector fights back, gets everyone compliant. It's a huge headache for everyone, and HMRC make nothing, and are back in unenforceable legislative land.

In the 18 years we’ve been watching HMRC badly applying it’s tax patches to the contractor sector, nothing surprises us anymore. The sensible option would be to repeal the IR35 Reforms. It would be crazy to leave the two-tier system in place, but also crazy to roll out to the private sector.

Because the sensible option of repeal isn’t in the HMRC vocabulary we think we will either see them go full steam ahead in April 2018 and announce a roll out, or turn a blind eye to the IR35 Reforms for a year whilst they take stock – and consider how to roll out a tweaked version in April 2019.

Published: Wednesday, September 27, 2017

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