The IR35 Forum Administration Review published by HMRC shows that the implementation of the tax legislation has not improved. This is despite the work of the IR35 Forum and new measures introduced in May 2012.
“The project was flawed from the outset because HMRC refused to listen to the external experts on the forum and due to the lack of measurable objectives,” believes ContractorCalculator CEO Dave Chaplin.
“The business entity tests (BETs) failed from the start, investigations are taking even longer than before, the contract review service is being used less and there are still no figures from HMRC regarding how much tax is being raised as a result of the procedures it introduced with much fanfare in May 2012.”
Plenty of rhetoric, but no real change
Derek Kelly, managing director at ClearSky Contractor Accounting, agrees, saying: “This document contains plenty of rhetoric, but it won’t change a thing. The people who need to know about IR35, namely contractors, already know about it – either through their accountant, recruitment firm or trade association.
“The report’s recommendations seemingly amount to a PR plan for IR35. Is that really what’s needed for a piece of legislation that is now 15 years old? I for one don’t believe so. Instead HMRC should focus on enforcing IR35 through use of its existing powers. I dread to think how much this review cost to produce. Contractors, along with service providers and recruiters, will now be hoping for a period of stability and certainty regarding IR35.”
Freelancer and Contractor Services Association CEO Julia Kermode is upbeat about the review, but highlights that there is more work to be done: “We welcome the IR35 Administration Review because it demonstrates a commitment to further improving the practical operation of IR35.There is still a lack of clarity, which is acknowledged within the report, and steps should be taken to address this.”
No qualitative data on IR35 administrations, despite HMRC’s promises
Qdos Consulting’s Seb Maley comments that the review is a “bit of a let-down”, noting: “Whilst it’s obviously positive that HMRC is actively working on improving areas of the legislation’s administration – particularly around guidance and advice – the review doesn’t shed any light on changes and improvements that have already been implemented.
This document contains plenty of rhetoric, but it won't change a thing
Derek Kelly, ClearSky Contractor Accounting
“Like many others, we have been waiting for and expecting data on what has actually happened since May 2012.”
According to Chaplin, the IR35 administration review should have been conducted as a proper project appraisal: “What were the targets? How did we score? What are the conclusions? Where did we do well and where did we do badly?
“These questions underpin basic project management and project milestone reviews but can’t be answered due to the lack of data. The real figures, if we are ever able to obtain them, are bound to demonstrate failure. This is why they aren’t being released, despite promises by HMRC.”
HMRC pledges to improve guidance “hardly game changing”
“Looking at HMRC’s responses to the recommendations, I don’t envisage there being any noticeable changes in the near future other than the removal of the BETs – which we already knew about,” continues Maley. “The pledge to improve guidance is certainly a positive step, but it’s hardly game changing.”
Maley’s comments are on the first of three areas that the review considers which are:
- HMRC’s guidance
- Improving customer [contractor/taxpayer] awareness of IR35
- HMRC’s approach to compliance.
The review of HMRC’s guidance looked at three areas:
- Updates to gov.uk and other web pages
- The Business Entity Tests (BETs)
- Improving the contract review service.
“IR35 is simply too complex for the existing guidance and we predicted that the BETs were doomed to fail from the outset,” says Chaplin. “Furthermore, the little quantitative data HMRC has published in this report shows that few contractors use the contract review service. This is simply a waste of precious HMRC resources and taxpayers’ money.”
Like many others, we have been waiting for and expecting data on what has actually happened since May 2012
Seb Maley, Qdos Consulting
Maley adds: “HMRC’s response to the contract review service is also positive, but I’d be surprised if significantly more contractors used it as a result.”
Awareness of IR35 is not the problem
However, although Chaplin believes that the review’s suggestion to use Companies House as a communication channel to signpost contractors toward IR35 during the company incorporation stage is a positive step, IR35 awareness is a non-problem.
“We have survey data that has been offered to the IR35 Forum via its non-HMRC membership that clearly shows contractors are well aware of IR35. 98% of contractors are aware of IR35, and 92% of contractors believe themselves to be ‘fairly familiar’ or better with the rules.
Chaplin is less impressed with proposals to host IR35 seminars for contractors and their agents: “There is a huge amount of high quality information available online, including hundreds of guides on ContractorCalculator alone. What purposes will HMRC-hosted IR35 seminars serve apart from consuming yet more resources?”
HMRC wants to engage with stakeholders, so why is it not talking to the media?
The review makes several mentions of the need to engage more with contracting stakeholders and run targeted communications campaigns, stating that: “It is [also] felt that HMRC demonstrates a fundamental lack of understanding of contracting.”
Recommendation 17 of the review says: A targeted communications campaign should be run with specific industries, where there has been a rapid growth in personal service companies to raise IR35 awareness e.g. oil and gas.
And in the introduction on page 7, the review says that “we will continue to look for innovative and cost effective ways to raise awareness and understanding of IR35”.
But it does not mention engaging directly with the contracting media, which Chaplin believes leaves a huge hole in HMRC’s communication strategy: “ContractorCalculator would be pleased to collaborate with HMRC over awareness and education campaigns that would result in more efficient and effective implementation of IR35. This is an area where we intend to be more proactive during 2015.”
There is no simple binary solution to determining employment status
The failure of the BETs and their forthcoming abolition highlights that it is simply not possible to create a simple binary test for employment status that incorporates the established body of case law underpinning IR35.
Chaplin explains: “There is a huge lesson to be learned from the BETs and why they failed. HMRC took advice from IR35 Forum members but proceeded with implementing the tests which have been shown not to work.
“This has been demonstrated by the limited data HMRC has published on the outcomes of the BETs and, more significantly, from the analysis of the comprehensive data ContractorCalculator has gathered through the use of its free online IR35 Test.
“This review rightly highlights the dangers of such tests, how the BETs have reached ‘quasi-legal’ status and that organisations, mainly in the public sector such as in central government and in the BBC, have incorporated the BETs as employment status tests or developed their own.
Chaplin concludes: “Of the 32 recommendations in the review, some are strong and may lead to improving the implementation of IR35.
“However, any review is fundamentally flawed if there are no measurable objectives to compare progress against. What little data we have shows HMRC’s administration of IR35 is going backwards. Until HMRC starts including clear objectives, milestones and measurements, and releasing data on these, we can only assume that the better administration of IR35 has so far been a failure.”