Contractors hoping that the new IR35 Forum will provide a quick fix to the many uncertainties surrounding IR35 are likely to be disappointed. That’s because HMRC’s proposed solution to the ‘better administration of IR35’ appears to be a very broad brushstroke approach that could certainly simplify things for HMRC, but would also retain the uncertainties over IR35 that have haunted contractors for more than 10 years.
HMRC’s plans, revealed in the minutes of the inaugural meeting of the IR35 Forum held on 6 May 2011, are to categorise contractors into three broad bands of ‘low’, ‘medium’ and ‘high’ risk of being inside IR35. HMRC believes this model is the “best way for reforming the administration of IR35”. However, it insisted that these categories would be applied without informing contractors or their advisers of what the risk criteria actually are.
It appears from the minutes that HMRC is set on imposing its own interpretation of the Forum’s role, by insisting that better administration “was intended to be construed in the widest sense of the word”. This should set alarm bells ringing as to whether, in HMRC’s view, ‘better administration’ simply means ‘better enforcement’.
Contractor segmentation
Background papers circulated by HMRC to Forum members proposed a ‘customer segmentation’ approach. Non-HMRC members of the Forum highlighted that such an approach did not adequately “recognise that there were professional contractors and temporary workers in the labour market”.
They also pointed out that the approach did not take into account the realities of the commercial marketplace, where “some temporary workers use agencies because it was often the only way they could obtain work”. And, getting to the heart of the issue, they said that “there were big differences between professional contractors and temporary workers, but it was not always easy to identify them.”
HMRC refused to agree to publish its detailed risk criteria, leaving contractors and their advisers in the dark as to how they should self-determine IR35 and make appropriate financial arrangements
It was also recorded that “what HMRC regarded as attempts to avoid tax were simply a reflection of what some people had to do to get work”. In response, HMRC went on record agreeing to consider how their segmentation approach could be expanded to accommodate the often harsh realities of the contracting and employment marketplace.
HMRC compliance and risk
According to HMRC, its compliance strategy should be to:
- “Enable taxpayers to decide whether HMRC viewed them as low, medium or high risk (and to make sure that that segmentation was transparent);
- Provide effective targeted guidance for each segment; and
- Where reviews of high risk cases were undertaken, to ensure such reviews were carried out as quickly as possible with as least disruption as possible.”
Despite proposing to classify contractors into three risk categories, HMRC refused to agree to publish its detailed risk criteria, leaving contractors and their advisers in the dark as to how they should self-determine IR35 and make appropriate financial arrangements.
HMRC did, however, agree “that providing greater transparency about the process might provide greater reassurance to those fearful of being subject to review on a purely random basis”.
Lack of consistency, and transparency, in the application of IR35
When challenged over allegations of inconsistency in applying IR35 legislation, HMRC went into denial, insisting that “in fact all IR35 reviews were conducted on the basis of risk assessment”. The tax authority also said that it would be “glad to investigate any evidence suggesting that IR35 cases had been selected or reviewed in an inconsistent way”.
But the contracting sector would never know the results of such investigations, if they ever took place, because HMRC said: “It would not be able to provide any information about whether, and if so, what action it might have taken following the provision of such information [about inconsistent application of IR35] because of the need to protect taxpayer confidentiality.”
Attention was also drawn to the time it takes to conduct an IR35 investigation, and how HMRC’s internal processes contributed to that approach with multiple inspectors each playing a part. HMRC “agreed to consider carefully the Forum's concerns regarding that approach”.
A “gateway test”: could this open the door to business tests?
The idea of using a ‘gateway test’ to enable contractors to determine their IR35 status was suggested, possibly developing the ideas submitted by PCG to the Office of Tax Simplification (OTS). Such approaches, when adopted in countries like Australia, have not benefited contractors.
In a similar vein, it was also proposed that HMRC might be able to develop an online interactive tool similar to the Employment Status Indicator. One commercial solution is already available in the form of ContractorCalculator’s Free Online IR35 Status Test. HMRC plans to draft guidance and a possible ‘gateway test’ for comment within the Forum.
Despite concerns that key issues had been skirted, including providing certainty over IR35 for contractors, the minutes concluded that members felt the first meeting had been “productive and constructive”.
The IR35 Forum was created to facilitate better administration of IR35, following Chancellor George Osborne’s 2011 Budget decision to retain the IR35 tax legislation in its current form. It includes representatives from HMRC, contracting and recruitment trade bodies and industry experts. The next meeting will be held on 29 June 2011 in London and ContractorCalculator will report on the results, including progress on HMRC’s action points, as soon as they are available.