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Off-payroll rules (IR35) – is HMRC killing UK plc and voluntary tax compliance?

At a critical juncture for IR35, the circulation of HMRC’s mistruths and propaganda risks causing irrevocable damage to UK plc. And while the taxman may celebrate a future private sector rollout of the IR35 reforms, it will come at a cost of enormous reputational damage to an organisation that heavily relies on voluntary compliance with the tax code.

This could be disastrous for HMRC and the Treasury. As more contractors lose trust in HMRC to act fairly, the taxman’s obsession with perceived non-compliance with IR35 could result in a massive backlash and increased non-compliance subsequently reducing tax take.

HMRC mistruths influence the IR35 debate

Last week via LinkedIn I shared the story of a locum nurse who was forced inside IR35 following the public sector reforms. Restricted in how far she can travel for work, she now works part-time. Subsequently HMRC collects less tax from her than before.

Like the general discourse surrounding IR35, the post divided opinion. Many comments acknowledged the flaws in HMRC’s approach, whilst others commented on the inequity of taxing contractors as employees without providing employment benefits.

At the other end of the spectrum, we heard some eerily familiar arguments frequently recited by HMRC, asserting its aspiration that two people performing a similar role should be equally taxed was raised. Similarly, other individuals stressed the idea that the changes only affected those who weren’t originally compliant.

Is IR35 discourse stuck in an ‘echo chamber’?

We’re repeatedly hearing the same arguments crop up again and again as IR35 seemingly becomes subject to the ‘echo chamber effect’.

Each argument in its own right is flawed. Frequently they are put forward by individuals who don’t understand how the contract sector works; there is no concept of the value of a flexible workforce, or grasp of why people work this way.

Many haven’t got to grips with the economics. It is the market that sets contract rates which themselves take into account numerous contractor costs, and contractors often generate more tax than employees. The overwhelming majority don’t understand employment case law, instead making claims based on inaccurate assumptions.

Of greater concern is that HMRC may be leveraging this consensus amongst some to vindicate its efforts to reform IR35 in the private sector. The irony is that these flawed arguments have all spawned from HMRC. These are the spurious claims that the taxman reinforced at every given opportunity to help force through the public sector reforms, despite their obvious flaws.

But are these arguments about to come back to bite HMRC, even harder than it has bitten the public sector with its fundamentally flawed reforms? By purporting false claims about IR35, HMRC could wind up tearing the fabric that underlies its entire tax collection philosophy – voluntary compliance.

HMRC rhetoric could cripple UK plc

As obvious as it was to us and many others, HMRC supposedly didn’t foresee imposing an effective 20% pay cut on flexible health workers was going to stretch already strained NHS resources. Other public sector organisations have been similarly affected, and the private sector will be next, if this IR35 rhetoric is not challenged and discussed.

HMRC has a legitimate concern; as working patterns change and more people move into self-employment, Employers National Insurance (NI) contributions have suffered – this is the extra 13.8% tax paid on top of salaries by employers, but which is not paid by the self-employed. But HMRC’s issue should really be with the tax system, not employment practices.

Relying on falsely premised arguments to underpin unlawful strategies to force contractors into false employment is no way to rescue its tax yield. The reforms have simply been a desperate and blatant attempt by HMRC to force already compliant tax payers to pay more tax than they should be paying.

How HMRC’s contractor pursuit will backfire - massively

So where does this leave HMRC? In 2012, the then Permanent Secretary for Tax at HMRC Dave Harnett said: “At the heart of HMRC’s compliance work lies the goal of voluntary compliance – where taxpayers freely meet their obligations.”

He added: “Integrity lies at the heart of the tax system. We challenge all taxpayers to be honest with us and we in turn must demonstrate integrity at every level of the organisation.”

Encouraging false employment and collecting more tax from already compliant taxpayers don’t sound like conventions of a tax collecting system with integrity. It’s fair to say that by now HMRC has desecrated its reputation for being fair.

For anybody who still isn’t convinced of HMRC’s one-sided view of IR35, the taxman recently admitted that research commissioned into the effect of the reforms sought zero feedback from contractors and other external stakeholders themselves.

HMRC is driving its credibility into the ground by defining and promoting its own rules which don’t align with the law of the land. Contractors have few, if any reasons to trust the taxman in a climate where complying could genuinely see them pay an excessive amount of tax.

It’s unfortunate, but there is already evidence to suggest that these changes have had a significant adverse effect on voluntary compliance, with a supposed rise in the number of schemes enabling contractors to evade tax. If things continue to progress the way that they have, the taxman will have a far bigger problem to contend with than IR35.

Published: 21 December 2017

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