20 reasons why HMRC should throw in its IR35 towel

The IR35 reforms that have hampered the public sector look set to be extended into the private sector, and the inevitable damage that it will cause will all be the taxman’s doing.

With IR35, HMRC has failed on all fronts. Prior to the public sector reforms, it disregarded a mounting body of evidence and input from industry experts warning of the problems that the changes would lead to.

The implementation of the reforms has been a shambles, and so has the introduction of HMRC’s Check Employment Status for Tax (CEST) tool. However, rather than acknowledging this, the taxman has recently been exposed for attempting to gloss over the issue by supressing the voice of contracting stakeholders.

HMRC is in denial, but it needs to do the honourable thing and acknowledge the problem before any more calamitous decisions are made.

Here are 20 reasons why HMRC needs to throw in its towel:

HMRC fails with the IR35 fundamentals

1. IR35 is unfair: Taxing people as employees without granting them employment rights is wrong – plain and simple.
2. HMRC misunderstands IR35: The taxman maintains that two people performing the same kind of work should be taxed the same. But there is no basis in law for this claim, and it isn’t what the IR35 legislation says either.
3. The taxman fails to take economics into account: HMRC overlooks the fact that contractors command higher fees and therefore generate more tax revenue than their permanent counterparts, meaning forcing contractors into employment is a tax-reducing measure.
4. Public sector rules threaten agencies: Agencies assume tax liability risk despite having no influence over the IR35 status decision. This threatens the livelihood of many agencies and is completely unfair.

Public sector IR35 reforms cause chaos

5. Clients can’t make proper assessments: Most clients lack the knowledge and resources to correctly apply the rules, and are misclassifying contractors. The fallout from this is false employment, a potential increase in the number of employment tribunals and a reduction in the availability of contractors.
6. The taxman made a mess of the implementation: Clients and agencies were ill-informed and CEST proved unfit-for-purpose. With the mess still unresolved and causing widespread damage, HMRC is nowhere near ready to implement changes on an even grander scale.
7. Legal challenges still active against unlawful blanket rules: Non-compliance amongst clients is rife, as many continue to impose blanket rules to sidestep compliance requirements.
8. Damage to the public sector has been proven: Survey results from ourselves and APSCo have highlighted the damaging impact on the public sector, yet HMRC refuses to listen.

The taxman’s CEST tool falls short of the mark

9. CEST is not fit for purpose: By testing CEST against the 21 historic IR35 tribunal cases, we proved beyond doubt that it isn’t fit for purpose.
10. Widespread acknowledgement of CEST’s shortcomings: Only 10% of contractors are now using CEST, and agencies and clients have turned away from it - HMRC’s attempt to manipulate IR35 is failing on this front.
11. HMRC ignored warnings from experts: Multiple expert sources warned IR35 was too complex and that CEST would be a failure. Yet again, HMRC didn’t listen.
12. CEST doesn’t align with case law: An examination of the underlying computer programming code and decision logic showed conclusively that CEST does not align with the case law and how cases are judged in court.
13. CEST won’t stand up in court: CEST will have no bearing in a tax tribunal, and contractors know this. HMRC is setting itself up for a fall in court if it chooses to stand by its tool.

HMRC wants to be a law unto itself

14. HMRC is acting ‘ultra vires’: HMRC is attempting to overwrite existing employment status and tax laws with CEST, which itself has no basis in law. The taxman has no powers to appoint itself judge, jury and executioner.
15. Attempts to enforce its own law with empty threats: HMRC has dismissed other means of IR35 assessment as “not helpful”, and says contractors who don’t use CEST risk facing penalties. This attempt to coerce contractors into using its flawed tool is encouraging false employment.
16. HMRC is making unlawful and weak guarantees: HMRC’s claim to stand by the result of its tool has no legal footing and comes with caveats making the claim irrelevant.

HMRC is misconstruing the facts about its failings

17. HMRC manipulated Forum meeting minutes to hide failings: The taxman was recently exposed for omitting criticism of the public sector reforms from contracting stakeholders from the most recent IR35 Forum minutes. HMRC needs to hold its hands up.
18. HMRC spreads propaganda to cover it’s failings:
    • When presented with evidence to show that its tool doesn’t match court case results, HMRC claimed no-one could possibly understand the cases in detail – despite ammost five hundred pages of the judges decisions having been in the public domain for a decade
    • HMRC insists contractors haven’t left the public sector, despite multiple sources proving otherwise
    • Several sources have reported rate increases to retain contractors, yet the taxman claims it hasn’t happened

The flexible market is suffering

19. The taxman is restricting flexibility: As demonstrated by the public sector reforms, all of the factors above threaten to compromise the flexibility that the UK labour market relies so heavily on.
20. Firms will need to pay a premium to access key skills: Companies who are able to hire contractors will have to pay much more to do so, meaning HMRC’s increased tax take will be to the severe detriment of UK industry as a whole.

Given the chaos that the changes to IR35 have caused in the public sector, HMRC cannot possibly expect to garner support for a private sector rollout. The only way that the taxman can resolve the imbalance in hiring costs between these sectors without risking serious damage to UK Plc is by repealing the reforms altogether. Let’s hope that HMRC sees sense soon.