So, just what is HMRC up to now, with its latest IR35 Forum moves? And should contractors be welcoming it, or fearing yet another unfair and unfocused onslaught by the taxman? As so often when it comes to IR35, the answer is unclear.
Contractors could interpret HMRC’s latest initiative – to create 12 ‘typical’ IR35 scenarios –in one of two ways. Either HMRC is intent on producing a sound basis for discussion with IR35’s stakeholders, for the sake of mutual learning; or it is intent on building 12 new boxes into which it will shoehorn contractors and slap its risk criteria on top for compliance-targeting purposes.
If HMRC’s intention is the former, to generate a constructive discussion about how its interpretation of IR35 differs from that of contractors, their advisers, service providers and contracting organisations, then it is to be applauded. Genuine debate and cooperation with HMRC has been in short supply throughout IR35’s troubled history.
An open discussion of the differences in the legislation’s interpretation by HMRC on the one hand and contractors and their professional advisors on the other, could be ideal. It might dispel many myths about contracting that HMRC seems to believe; and it could help contractors’ advisors understand what drives HMRC’s processes. Such mutual understanding could be of huge benefit to contractors and result in fairer and more effective targeting of IR35’s enforcement.
However, if the objective is to create a series of inflexible classifications into which all contractors must ‘fit’, and to marry those to HMRC’s risk criteria, then the initiative is doomed to failure. And, in all likelihood, a very painful and long-drawn-out failure for all concerned.
The nature of the IR35 legislation is such that there are as many classifications as there are contractors. Any attempt to classify contractors using 12 ‘model scenarios’ will lead to a “yes but, no but” type conversation, in which no one would be able to reach agreement and no one would ultimately benefit.
The unfortunate fact is that the intermediaries legislation that underpins IR35 was poorly drafted. The result is that it now relies on such complex tests of employment and case law that it is only possible to judge each contractor’s case on its individual merits.
There is a continuum from disguised employees who are clearly inside IR35 through many shades of grey to genuine contractor businesses well outside of IR35. And there is absolutely no way that all the stages on that continuum can be accurately placed into 12 scenarios.
Perhaps we are nearing crunch time for the IR35 Forum? The next meeting in November, and what occurs in between, could turn out to be pivotal.
Either HMRC is unashamedly using the knowledge offered by the contracting experts on the Forum to build a hard-hitting campaign that will more effectively target a greater number of contractors, many of whom should be well outside IR35. Or HMRC has acknowledged that it would better serve taxpayers, and HM Treasury, by targeting just the disguised employee abusers of the favourable tax regime enjoyed by small incorporated businesses.
And, in doing that, leave genuine contractors to play their part in digging UK PLC out of the economic hole it finds itself in.