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10 reasons why the public sector IR35 reforms have been a farce

The public sector IR35 reforms have been nothing short of a complete shambles. Not only HMRC’s mistakes, but also its refusal to acknowledge its mistakes, are to blame.

The taxman’s logic is punctured with holes, yet no matter how many times this is pointed out to HMRC, it can’t provide a rational argument. Here are ten reasons why the public sector IR35 reforms have been a farce.

1. HMRC’s interpretation of employment case law

When you base your efforts to achieve a fair tax system on a fundamental misunderstanding of IR35 itself, you’re setting yourself up for a fall.

Despite the fact that a contractor receives no employment rights or job security, the taxman insists that two people doing the same job should pay the same amount of tax. This simply isn’t the case according to employment case law, which underpins IR35.

2. The taxman’s flawed logic

HMRC will gladly point out that a contractor being paid the same as an employee doing the same work pays less tax because National Insurance Contributions (NICs) are avoided.

But when you ask why inside-IR35 contractors don’t get employment rights, HMRC will say it’s because they typically earn more. But if they earn more, it also means they pay more tax, as our survey clearly demonstrated.

3. Shifting the IR35 compliance burden

By making public sector clients and agencies - IR35 novices - responsible for compliance, HMRC has been accused of shirking its own responsibilities.

Commentators have pointed out that the tax liability risk encourages risk-averse behaviour from clients, resulting in many contractors being unfairly bundled into inside-IR35 contracts.

4. HMRC’s Employment Status Service (ESS) tool

HMRC’s skewed view of IR35 formed the basis of the Employment Status Service (ESS), the tool introduced to help clients and agencies test IR35 status.

Experts have confirmed that it does not align with employment case law, and ContractorCalculator found that it doesn’t even align with any of the results from historic IR35 cases. Yet the taxman maintains the ESS is accurate.

5. HMRC’s desire to set, not enforce, the law

It’s the taxman’s job to enforce tax laws, not set them, but you’d be forgiven for thinking otherwise. HMRC is heavily encouraging use of the ESS, which it claims provides absolute certainty, despite a lack of rigorous checks or external auditing of its accuracy.

By promoting its tool as anything more than advisory, HMRC has vested powers in itself to effectively override the law. This is despite legal experts saying the tool has no legal authority.

6. HMRC’s refusal to stand by the ESS

On top of this, HMRC has curiously granted itself authority to challenge the judgment made by the tool if:

  • HMRC feels the questions have been answered incorrectly; or
  • HMRC believes the working relationship is contrived.

So the contractor and client are in limbo. Either the contractor is caught by IR35 according to the ESS, or they aren’t caught but their status is open to challenge. HMRC has reportedly already challenged the status of the developers who built the tool, who reportedly walked away from the project as a result.

7. HMRC’s unrealistic timeframe

HMRC only made the ESS available days before the public sector reforms took effect, leaving clients and agencies without enough time to test and process contractors.

As a result, many clients attempted to impose blanket bans on limited companies to avoid their compliance responsibilities. This was in spite of the requirement for them to take ‘reasonable care’, added to the Finance Bill at the last minute.

8. Contractors abandoning the public sector

The knock-on effect of this: a contractor exodus from the public sector. Many contractors have already left the public sector and its draconian rules for the private sector.

The result is intensified skills shortages, and the effects stretch far and wide. Some locum doctors have stopped working for the NHS, and social workers have left because the impact of IR35 on their take-home pay means they are better off taking minimum wage jobs elsewhere.

9. Contractor rate hikes stretching public sector resources

Others have increased their rates by roughly 20% to compensate for earnings lost to excessive taxation. Already thin public sector resources are being stretched further as a result.

Recently sources have reported that IT contractors and locum doctors are demanding pay increases as a result of the reforms. IR35 is beginning to look like an effective tax on the NHS.

10. HMRC’s refusal to acknowledge the problem

Despite all of the evidence stacking up, HMRC still seems blissfully unaware of the impact of the IR35 reforms on the public sector.

We have yet to see any cause for concern,” was HMRC’s response to a recent report that IT contractors were fleeing the public sector. This can only mean further chaos looking ahead.

What next for IR35?

It’s clear that HMRC will never admit its own mistakes. Instead, expect the taxman to claim the reforms have been a massive success, followed by a private sector roll out of the changes.

This may sound ludicrous, but it’s perfectly in keeping with goings on over the last 18 months. The sad reality is that, despite extensive lobbying to MPs over many years, those in power still incorrectly see contractors as tax dodgers. We need to be prepared for a worst case scenario, otherwise every contractor could succumb to blanket decision making and be unjustly forced into IR35.

Published: 03 May 2017

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