ContractorCalculator proposes that without benchmarking and measuring the administration of IR35, neither HMRC, nor the Treasury or taxpayers, will be able to know whether measures to improve its administration have been successful. This is the fifth in a series of articles analysing the options available to the IR35 Forum as it determines how HMRC might better administer IR35.
Whilst contractors and the contracting community broadly welcome the intention to ‘better administer IR35’, there remains what appears to be an almost unanswerable question: “Better than what, precisely?”.
When HMRC and the Office of Tax Simplification were tasked with reviewing IR35, there was a requirement for any changes to be “revenue neutral”. That’s political-speak for “Don’t make any changes that will lose the Treasury any existing tax income.”
And, of course, only the most optimistic of contractors would think anything else but that what the Treasury really meant was, “However you choose to administer IR35, make sure you use the legislation to extract more tax out of contractors than you’ve previously been able to.”
At the heart of both these statements is the understanding that the one element that won’t change is the legislation itself. IR35 remains on the statue book and the legislation, plus the case law supporting it, remains unchanged. The only thing that may change is how HMRC chooses to administer IR35, which is where the IR35 Forum comes in.
But how will we know if any changes that are introduced meet the Treasury’s aims of making “clear improvements to the way IR35 is administered”? The only way to know for certain is to benchmark and measure performance, so it is essential that the IR35 Forum insists that is done.
No benchmark or historical data
HMRC has already proven itself adept at not monitoring its own performance when it comes to IR35. In response to a Freedom of Information Act request by ContractorCalculator, it admitted that it does not hold the kind of data that would facilitate an analysis of the first ten years of IR35’s administration.
HMRC has already proven itself adept at not monitoring its own performance when it comes to IR35
Indeed, recording the amount of time spent by individual officers on specific cases only began in April 2010. That means that it is simply not possible to calculate how much it has cost taxpayers to administer IR35 in its current form. Therefore, producing a benchmark cannot be done.
Compounding the lack of hard data held by HMRC is the behavioural impact of changing the way IR35 is administered. For example, whilst it is reasonable to speculate that the popularity of umbrellas in the early noughties stemmed from the introduction and rigorous enforcement of IR35 at that time, it is not possible to be definitive.
And how should the huge sums of Pay As You Earn (PAYE) income tax and National Insurance Contributions (NICs) collected by umbrella companies be classified? As yield from IR35, or simply put in the general employment taxes pot?
Introducing measurement processes
So, because of HMRC’s lack of metrics, a clear benchmark cannot be drawn. So how might the IR35 Forum help put in place processes that could be used to measure whether any new system is doing a better job of administering IR35 than what has gone before? Here are a few suggestions:
- Taking some measurements now – it might be necessary to conduct customer [taxpayer] research for this to be effective and to gain insights into the behavioural impact of what HMRC is doing now, and has done in the past
- Create a benchmark, and a snapshot of what customers perceive to be good, neutral and bad about the current situation
- Make the changes developed in the IR35 Forum
- Regularly take the same measurements, including basic items such as tax yield, costs of implementation and administration, and further customer research
- Analyse the data to determine whether any of the changes in IR35’s administration have impacted on the measurables
- Review process changes, then reverse, enhance or adapt them as required, based on the information coming from the metrics and analysis.
For the measurement results to be meaningful, a year’s worth of data is probably the minimum period over which any measurement trials should take place. It therefore follows that any changes adopted (whether or not they come about in response to IR35 Forum proposals) should be in place for at least a year.
Clearly the measurement and analysis would have benefits for HMRC and the Treasury. They will be able to track changes in tax yields and changes in the costs to administer IR35. Increased yield and lower costs, together with customer perceptions that the process was administered better and more fairly, would be the desired result.
Without measurement, changes to IR35’s administration would be meaningless
If HMRC and the Treasury are serious about improving the administration of IR35, and improving the experience contractors have of the process, it must put transparent measurement processes into place.
Should the work of the IR35 Forum lead to revised guidance without proposing new processes to gauge its effectiveness, then in reality HMRC will only be paying lip-service to the Treasury’s desire to see “clear improvements to the way IR35 is administered”.
The IR35 Forum has a unique opportunity to create a tax regime that offers the fairness and certainty contractors and their agents require, whilst meeting the Treasury’s need to maintain or increase tax yield. Devising and adopting new measurement processes is a vital element of that process.