In yet another startling case of this coalition government ‘just not getting it’, the one element of common sense from the original IR35 legislation has just been thoughtlessly dumped. And it’s going to cost contractors, the public sector and taxpayers dearly.
The Cabinet Office has published its guidance on how government departments should implement the new off-payroll rules by requiring that contractors apply the business entity tests and IR35 legislation. And public sector clients must police the rules, which will ultimately lead to higher costs for taxpayers and poorer public services for all.
IR35 nerds, like the author of this blog, may be dredging up from the backs of their minds a statement from the earliest days of IR35, that: “It would be inappropriate and burdensome to require a client to check.” Surely such a quote would have come from a lobbyist on behalf of 1990s contractors, recruiters or employers. But no, the source is in fact HMRC, speculating back in 1999 on how it might tackle the thorny problem of disguised employment.
The taxman went on to suggest, quite sensibly, that: “What is required is a system to allow clients, or potential clients, to check (quickly, easily and at minimum cost) whether or not they can make payments gross.” HMRC even proposed that workers caught by the legislation would find that: “The client will account for PAYE/NICs on relevant payments made to the intermediary or to the worker – broadly following existing PAYE/NICs rules.”
The rest is history; IR35 history.
But, as we know from past events, client organisation funded lobbyists had these proposals removed. Contractors were expected to self-certify and, surprise surprise, not many opted to voluntarily increase their tax bills to the tune of an average extra £10,000 a year. HMRC tried applying the rules without much success for 12 years, until recently when it clearly decided it was doing such a bad job that three specialist teams were created.
Now government is imposing a new set of rules that its own tax-gathering professionals decided 12 years ago would be “inappropriate and burdensome” on its own departments. And this from the same government that created the Office of Tax Simplification!
‘Simplification’ is the last word to be used for what is being imposed by this blundering coalition. In practice, there will be as many implementation strategies as there are government departments. Some managers will accept contract reviews by external agencies, retain genuine contractors as contractors and keep their departments running smoothly. Others may opt for the course of extreme caution and will refer all their contractors to HMRC. And the taxman, desperate for cash and positive news, will rate many inappropriately as being inside IR35, taking us right back to the uncertainty and over-complication the Coalition promised to remove from business taxation.
But that’s just the start of the mess. Many contractors are likely to leave the public sector – voluntarily and involuntarily – if their public sector client or HMRC decides they are inside IR35. This in turn may well lead to contractors taking legal action for breach of contract if they subsequently prove in a court that HMRC was wrong about their IR35 status.
The path of least resistance will dominate. As the supply of key contractor resources to the public sector dwindles, those departments accepting non-HMRC yet perfectly legitimate contract and working practices reviews will attract the best. Those operating more draconian policies will be left with the rest, or be charged a 20%-plus premium to make up for the loss of net income for those highly competent and badly needed contractors prepared to work on the payroll.
And you can imagine what else might happen. HMRC decides a contractor is inside IR35 – a disguised employee, no less – who is then let go by their public sector client, resulting in the contractor-cum-employee putting the employment tribunal kettle on for a cup of terminated-unfairly tea!
The result of all of this unnecessary extra red tape?: higher costs; less qualified workers; poorer public service delivery; and a few fleeting moments of media triumph for the administration after instituting yet another contractor witchhunt inspired by ignorance and desperation for approval.
Contractors, the public sector and taxpayers deserve better.