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IR35 reforms: HMRC’s tool could mean wholesale stitch up of contractors

HMRC has set itself up to inadvertently mislead public sector organisations into forcing legitimate contractors into false employment with its ‘Employment Status Service’ tool, in a move that could result in a wholesale stitch up of public sector contractors.

Though HMRC says its tool aligns with the complex case law necessary to reach an accurate IR35 judgement, there is a unanimous belief amongst industry experts who have seen the tool that it doesn’t make the grade.

What’s more worrying is the emphasis the taxman is placing on the use of its yet-to-be developed tool. Both David Gauke’s letter to Secretaries of State and HMRC’s technical note on the legislation strongly urge public sector organisations to use it, without acknowledging any alternative means of testing.

  • If HMRC’s tool does not align with case law it will be misrepresenting the law
  • Public sector bodies are being forced into a very unsavoury position
  • The Government appears to be no longer supporting flexible workers in the tax system
  • Public sector contractors need to act now to ensure they won't be affected

If these issues aren’t addressed, the fallout will be severe for both public sector contractors and clients.

Why HMRC’s tool is a disaster waiting to happen

Having consulted with HMRC on the development of its tool, we know that the taxman has attempted to align it with case law. HMRC’s decision to include a third ‘don’t know’ outcome – along with ‘pass’ and ‘fail’ – was a result of our direct lobbying. But it’s still not enough, and the overriding view of many who have seen the tool is that too many genuine contractors will simply not make it into their pass zone.

HMRC’s tool will only pass contractors when it is 100% certain that they are outside IR35. This will be a very minute proportion, but that doesn’t mean only a tiny amount of contractors are actually outside IR35.

Due to the complexity of the case law it is based on – so complex that HMRC itself can’t grasp it – IR35 status needs to be placed on a spectrum in order to provide an accurate assessment.

Take the M1 from London to Leeds, for example. You can’t assume somebody who isn’t in London is in fact in Leeds. They could be closer to London, closer to Leeds, or half way in-between in Leicester. The HMRC tool is a bit like saying that unless you are stood within 500 metres of the centre of London in Trafalgar Square, then you aren’t officially in London.

Will public sector clients be forced to use HMRC’s IR35 tool?

HMRC has confirmed that end clients will assume responsibility for checking contractors for IR35 from April 2017, and has suggested they can determine status solely on the basis of its tool. However, there were numerous omissions from the published documents, including:

  • Acknowledgement of other means of testing IR35 status
  • Instructions or apportion of liability in the instance of an incorrect judgement
  • Provisions for appeals against judgements

Given that HMRC has already stated it will be bound by the outcome determined by its tool, all the indications are that it is looking to ensure all compliance procedures run through its own system.

Contractors and clients – the knock-on effect

So where does this leave contractors? Many will want to continue contracting in the public sector, but will rightfully refuse to unless either:

  1. They are kept outside of IR35
  2. They are able to increase their rates to account for lost income

Contractors in the public sector need to consider their position and act fast, as the above look like increasingly unlikely scenarios. And what happens if a contractor renews an outside-IR35 contract and HMRC’s tool determines it is in fact inside?

Are they then required to cough up backdated taxes for work carried out prior to the changes because they’ve supposedly admitted to being inside IR35 all along? Public sector contracting suddenly becomes a far less appealing prospect.

Then we need to consider the impact on public sector clients. These clients will be forced into a corner with little option but to comply with the taxman’s wishes if the early indications are anything to go by.

Many are extremely worried about contractors jumping ship, and with good reason. It’s a lose-lose situation all round, all built upon an assessment tool that isn’t fit for purpose.

Taxman comments are a major concern for contractors

This is all indicative of a Government that is increasingly heedless to the plight of contractors, and HMRC’s blunt comments in its summary of responses document sum it all up:

‘The Government does not believe that choosing to work through a limited company should necessarily affect the amount of tax an individual pays… Individuals doing the same job should be treated similarly, regardless of whether or not they work through a company.’

This completely contradicts what the Government has been saying about supporting the self-employed, as well as employment status itself, which is not about the duties carried out, but rather the working relationship between a worker and their hirer.

HMRC is claiming a full time IT programmer and a contractor doing similar development work on a three-month contract should be treated the same – despite the fact that the flexible worker takes on more risks and receives no employment rights and is only working on a project basis.

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These changes will impact public sector contractors and clients very hard. All experts expect they will be rolled out to the private sector in due course. ContractorCalculator will be working hard to uncover further changes that will impact on the industry, and specifically on IR35. Sign up to ContractorCalculator and join thousands of contractors by receiving up-to-date news and reaction from the sector in your inbox.

Published: 07 December 2016

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