IR35 and Off-Payroll Explained

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IR35 Forum – Part 3: Better administration of IR35 – so what does that actually mean?

ContractorCalculator examines what “clear improvements to the way IR35 is administered” might, and might not, look like from a contracting perspective. This is the third in a series of articles analysing the options available to the IR35 Forum as it determines how HMRC might better administer IR35.

In its 2011 Budget document, the government committed to making “clear improvements to the way IR35 is administered”. Specifically, its commitments included:

  • “Publishing guidance on those types of cases HMRC views as outside the scope of IR35”
  • “Targeting compliance activity by restricting reviews to high risk cases” and
  • “Setting up an IR35 Forum that will monitor HMRC’s new approach.”

Already the minutes of the first IR35 Forum have offered insights into what HMRC views as better administration of IR35. And HMRC’s better administration is shaping up not to be “clear improvements” at all, from a contracting perspective.

The taxman’s opening gambit is that better administration “was intended to be construed in the widest sense of the word”. This should set alarm bells ringing as to whether HMRC’s view is that “better administration” simply means “tougher enforcement”.

Better administration won’t mean better legislation, but better processes

IR35 has not been repealed. The legislation remains in force in its original badly constructed, botched and muddled form. Contractors caught by IR35 must still pay the price of paying tax as if they were employed, but without enjoying any of the benefits and protections offered by employment law.

The IR35 case law developed over the last ten years will also continue to apply, and the lessons learned from, and legal precedents set by, cases like Dragonfly, Larkstar and Novosoft all remain in place.

So the only route to clear improvements in the administration of IR35 will be process improvements. If those lead to catching the blatant cases, such as the ‘Friday to Monday mob’, the permtractors and ‘tail-end Charlies’, and leaves the borderline cases alone, then that’s a positive step for the contracting sector.

But new processes that actually widen the net and catch or seriously inconvenience genuine contractors will be a regressive step.

The “clear improvements” sought by contractors

If the IR35 Forum is to succeed in its task of monitoring HMRC’s new approach, then clear improvements in guidance and process must be the result. Specifically, contractors need to be able to:

  • Understand the risk criteria HMRC will apply to segment contractors into being at high, medium or low risk of being inside IR35. If contractors understand those criteria, a minority may apply them to attempt to evade tax. The majority will understand and accept their status because the alternative is to break the law.
  • Believe and trust that HMRC will apply the risk criteria consistently, that there will be no ‘inspector lottery’ and that the mavericks of years gone by, who from outward appearances appeared to delight in tormenting contractors, will themselves understand and stick to the rules.
  • Understand the inspection and tribunal process, and that the process has a time limit. Tribunals should be fast-tracked so contractors won’t spend several years uncertain of their tax status. More than one contractor has stopped their defence campaign, citing ‘family reasons’. It doesn’t take a rocket scientist to deduce that in some cases this probably means stress and a fear of haemorrhaging money in defence fees. Equally, though, contractors should understand that if they wilfully delay the process then they will be punished, and quite rightly so.
  • Believe that they can expect certainty in their tax affairs and fair treatment by HMRC.

The above, to a contractor or any other businessperson, is mainly common sense. But HMRC has very few decision makers who have ever done anything other than be tax inspectors, so HMRC should be offered these kinds of insights to help it put better processes into place.

Renewed and meaningful guidance

Accompanying the risk criteria and improvements in process must be renewed and meaningful guidance. Existing guidance is so broad as to be meaningless, potentially branding virtually all contractors as tax evaders and inside IR35, when this is clearly not the case.

There must also be room for interpretation, and that’s why the UK has such an effective and, on the whole, fair legal system. For example, the guidance might say that individuals who left a former employer on a Friday and started work as a consultant on the Monday doing the same work at the same desk may be considered as disguised employees.

What would be of great value to contractors would be if the guidance went on to qualify this by suggesting that if the same individual then remained in that position for several years without seeking alternative contracts or doing anything that remotely resembled running a business, then they would almost certainly be disguised employees. That way, contractors would know where they stand.

What if “administration” simply turns out to mean “tougher enforcement”

It took ten years, but ultimately HMRC lost the first battle over IR35. The contracting sector, and its expert advisers, got so wise to HMRC’ tactics that the number of cases has slowed to a trickle.

But the country desperately needs tax revenues, and limited company contractors, particularly where spouses share the income, are perceived as being a major contributor to the ‘tax gap’. And the IR35 Forum will be providing HMRC with lots of really useful market data about how contractors and contracting works, and how so many contractors have managed to avoid IR35 to date.

Let's get our IR35 house in order and make sure we catch and tax to the hilt all those vulnerable, unrepresented one-person and husband-and-wife limited companies

What contractors really want to happen is that HMRC will think: “Let’s give the taxpaying public much better guidance, so they will truly know if they are caught by IR35 or not, so they can plan for their taxes much better. Let’s also make it clear that we are only interested in going after tax evaders.”

Unfortunately, what may actually happen is that HMRC will think: “Let’s get our IR35 house in order and make sure we catch and tax to the hilt all those vulnerable, unrepresented one-person and husband-and-wife limited companies.”

The fourth part of ContractorCalculator’s series of articles on the IR35 Forum will explain why business tests, and HMRC’s ‘gateway tests’, will add further complexity to administering IR35 and will ultimately fail contractors, potentially resulting in a draconian approach to taxing the contracting sector.

Published: 30 June 2011

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IR35 and Off-Payroll Explained