The UK's leading contractor site. 200,000 monthly unique visitors.

Nixon Williams

HMRC poised to score spectacular own goal on IR35 reforms

HMRC’s failure to heed stark warnings about its implementation of the public sector IR35 reforms has left the taxman in a Catch-22 situation, where the only goal it can score in is its own.

The controversial reforms are underpinned by HMRC’s flawed Check Employment Status for Tax (CEST) tool. After MPs expressed concerns about the potential heavy administrative burden placed on public sector bodies as they planned to implement the reform proposals, HMRC promised a simple, effective compliance solution in the form of CEST.

What can HMRC do about CEST?

What HMRC hadn’t considered was that no such tool could be built in such a short time frame to cover every single type of worker across the spectrum of BBC presenter, DJ, plumber, IT programmer, engineer, actor, and so on. In spite of the warnings from experts and industry stakeholders, HMRC built CEST in a matter of months, just in time to meet the April 2017 implementation of the reforms. Predictably, the result is a tool that:

HMRC has since stated that CEST omits mutuality of obligation (MOO) – a key IR35 factor - because it assumes MOO to be present in all contractor engagements. Over recent months, HMRC has promised to present its reasoning behind this flawed assumption, but has so far failed to deliver.

HMRC is at a dead end. CEST’s shortcomings are now public knowledge, and HMRC’s stance on MOO is simply untenable. Logically, the only way out is for the taxman to backtrack and concede that it was wrong.

Astonishingly though, HMRC instead appears poised to attempt to convince us that the law surrounding IR35 is not what it says it is.

They have two possible options.

Option A: admit CEST is flawed and that they are wrong about MOO

This is the only way that HMRC can escape with any integrity intact. The downside for the taxman is it will have enormous repercussions. Admitting that its claims about MOO are incorrect means admitting that CEST is flawed and that all historic assessments are essentially void.

It means conceding that CEST’s developers were sent on a death march project, where they were doomed to fall short of delivering on the impossible promise made by HMRC to MPs.

Potentially hundreds of thousands of contractors would require reassessment. Inevitably, many will find that they have been subject to unlawful tax deductions, paving the way for appeals and tribunals.

In addition to the embarrassment and spiralling costs, this admission could sink the public sector reforms legislation, given that CEST was the cornerstone for the rollout. It would surely end HMRC’s hopes of extending the reforms into the private sector. This would be a huge and costly scandal, yet is still the better option of the two.

Option B: continue to ‘interpret’ the law to suit CEST

HMRC has reached this point by maintaining an argument that flies in the face of the employment case law underpinning IR35. The notion that every contractor is automatically caught by MOO is preposterous, yet the taxman continues to swear by it.

HMRC has long promised to disclose its legal arguments, and indications from the most recent IR35 Forum suggest these could be imminent. The minutes show that HMRC has encouraged forum members to comment on a draft paper affirming its stance, which is due to be released once feedback has been considered.

The problem for HMRC is forum members are unlikely to lend much, if any, support to its narrow claims about MOO. HMRC can’t expect forum members to endorse its views on MOO if it is contrary to theirs. Neither can it release a paper that opposes forum sentiment without also publishing the feedback that members have provided. HMRC has cornered itself.

The easy way out: what might HMRC try to do?

The impression shared amongst tax experts is that HMRC doesn’t consider MOO to be a useful test and believes that it shouldn’t play a part in determining IR35 status.

HMRC insists that a simple engagement, whereby a worker carries out work offered to them, constitutes MOO. This is true, in tax law. Unfortunately for HMRC, IR35 depends on employment status indicators that fall within employment law, which considers MOO to be an ongoing obligation between worker and hirer. This is a much harder criterion to satisfy.

However, the recent MDCM Ltd IR35 tribunal case suggests that there still isn’t always absolute clarity over the applicable interpretation, as the judge seemingly referred to both forms of MOO during the ruling.

With this in mind, don’t be surprised if HMRC’s paper emphasises the complexities of MOO, diverting attention towards the discussion surrounding it, and away from the fact that it is omitted from CEST.

The taxman has spent much time dancing around the topic without delivering anything definitive, its pending arguments will likely provide more of the same.

Independent research commissioned by HMRC into the impact of the reforms on the public sector, and the upcoming consultation for a private sector rollout, are also imminent. Though the widespread chaos caused by the reforms has been well documented, through HMRC’s rose-tinted glasses we expect a far more positive interpretation of the past years’ events.

Why is HMRC not taking steps to address CEST?

While the debate rumbles on, it appears the taxman has made no effort to fix CEST’s faults. CEST’s original timeline stated the tool would go live in April 2017, at which point users were advised to rely on its assessments.

At the same time, HMRC noted that CEST would be subject to continued development, in doing so, effectively making the admission that it had released a tool that wasn’t ready for public use.

Not only this, but a quick examination of the code repository for CEST shows that there have been no significant changes made to the code base for almost a year. One year on from the reforms, despite having been used hundreds of thousands of times, CEST development appears to have been largely abandoned and is no longer a work in progress.

The clock is ticking for HMRC

HMRC has a chance to at least begin to right its wrongs. It remains to be seen whether it chooses to do so, or instead attempts to cover up its failings with misdirection and false claims.

One thing that’s for certain - in choosing the latter option, it will only place the taxman in even hotter water than before. Contractors are ready to litigate against agencies and clients for unlawful deductions of employment taxes, and thousands of appeals against CEST assessments expected to be launched and hit tribunals.

When the starting whistle blows, ContractorCalculator and other stakeholders will be ready to expose CEST for what it is; utter incompetence, and a waste of taxpayers’ money and resources by HMRC. Over the coming months, as the final pieces of evidence are collated, ContractorCalculator will call for a public inquiry. This will be the point of no return for the taxman. We encourage HMRC to get out while it still can.

Published: Thursday, April 12, 2018

© 2018 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.

Contractors handbook