IR35 will be better administered, we’ve been assured. But we’ve not been told what that actually means. So in the absence of any evidence to the contrary, we have to assume that ‘better administered’ means ‘better enforced’.
This raises two further issues: firstly, is it right to assume that ‘better administered’ does indeed mean ‘better enforced’; and secondly, if that is the case, are things likely to get better or worse for genuine contractors?
When tasked by the Chancellor’s 2011 Budget with identifying better administration methods, the IR35 Forum and, more specifically, its HMRC representatives, were given guidance that any solutions must be revenue neutral. So, the overall tax take has to remain at the same level as it was at the time of the budget. Which, to be simplistic, means that no contractor should be feeling hopeful about paying less tax in future as a result of the IR35 Forum’s work.
Let’s throw something else into the mix. A number of recent labour market surveys are in agreement that ever-more workers are choosing flexible working, freelancing and contracting over employment. So, to maintain the same levels of tax yield, HMRC will actually have to step up its enforcement to catch the greater number of disguised employees that are likely to arise as a result of the ever-expanding pool of flexible workers.
So whichever way you look at it, contractors should be readying themselves for better enforcement of IR35, and more of it. And early indications from the IR35 Forum appear to back this up. For example, HMRC’s opening gambit at the very first meeting of the IR35 Forum was to make it plain that the taxman is planning to classify flexible workers into risk bands. But, against the spirit of openness many expected the Forum to engender, HMRC refused to offer any guidance on just what criteria they might apply.
But would such guidance have provided useful anyway? Some of the UK’s best taxation minds, both within and without HMRC, have been focusing on IR35 for over a decade. Yet its implementation is a shambles. You only have to look at the details of HMRC’s most recent defeats to convince you of this: the ECR Consulting, Marlen and Primary Path cases should never have been pursued beyond the earliest investigation stages; yet between them have taken many years of painful investigation before they were all thrown out at tribunal.
Others are pinning their hopes for the ‘better administration of IR35’ on the use of gateway, or ‘in-business’ tests. But such tests have many potential pitfalls, as Australian contractors have found to their cost (literally) after similar tests were introduced there. If they were introduced in the UK, they could leave the majority of contractors worse off than they are now. And no matter how much pain the ‘in-business’ tests caused, HMRC wouldn’t need to budge; even if criticised by legislators it could simply claim the tests were introduced with the contracting sector’s blessing, via the IR35 Forum.
But don’t despair, there are some glimmers of hope, albeit somewhat buried away*. There is talk of creating a centralised and specialised IR35 unit staffed by IR35 experts who will tackle only high risk cases, with clear guidance for inspectors and/or a strict code of practice. What’s not to like about that option? Why would that be a bad thing for genuine contractors?
Expert application of clearly understood risk criteria and implementation of the rules by specialists would be a definite step in the right direction.
Obvious high risk cases would be targeted, including ‘Friday to Monday’ workers, ‘tail-end-charlies’ and ‘permtractors’. And exceptional cases likely to lead to a successful investigation would be spotted by HMRC’s IR35 specialists. At the same time, detailed guidance and a code of conduct would prevent cases lasting years and give grounds for appeal by contractors facing overzealous inspectors.
More importantly, genuine contractors would be left to do what they do best, finding solutions that ultimately strengthen the UK Plc.
IR35 will not be abolished. In fact, something like it is likely to remain with us until there is a root and branch reform of UK tax laws, including a merger of National Insurance Contributions (NICs) and income tax. So perhaps better enforcement might be the best we can hope for. But only if it’s the right sort of better enforcement, which is fairer, clearer and only targets disguised employees, not genuine contractors.
* The glimmers of hope can be found: the Office of Tax Simplification’s interim Small Business Taxation Review (Table C.3); in the 2011 Budget document (paragraph 2.203); and in the minutes of the inaugural IR35 Forum meeting.