How many tax inspectors and experts does it take to better administer IR35? The answer is more than the estimated 40 employment status experts and their support staff currently allocated to implementing the legislation, if the IR35 Forum Administration Review is to be believed.
In fact, based on the limited data HMRC has chosen to release, the entire exercise of trying to better administer IR35 according to Chancellor George Osborne’s instructions back in Match 2011 has been a complete waste of time.
Blighted from the outset because of a lack of clear measurable objectives that identify what ‘better administration’ actually means, HMRC’s management of IR35 would appear to be worse now that before the Office of Tax Simplification (OTS) conducted its review into IR35.
What is most frustrating is that it started well. When the IR35 Forum was launched in May 2011, it assembled possibly the richest source of IR35 and contracting sector expertise contractors could wish for devoted to making their lives more tolerable. Confidence and expectations were high.
During the course of the next 11 months, successive sets of minutes showed solid progress towards developing a new IR35 administration framework. The forum was saddled with the existing IR35 legislation – that could not changed, and remains unchanged today. But how HMRC chose to implement the legislation could change.
The first hiccup occurred in May 2012 when the new IR35 administration framework was launched by HMRC. There were some promising, if somewhat loaded and ambiguous new guidance and IR35 scenarios. These were accompanied by a revamped Contract Review Service and IR35 helpline and the then new business entity tests (BETs).
Internally, HMRC reorganised itself into three growing to four specialist teams with status inspectors who have the expertise to deal with the highly complex IR35 rules and employment status legislation and case law.
All future IR35 cases nationally would be referred to these experts, and not dealt with by local inspectors who lack the expertise required to implement IR35 effectively. HMRC made many commitments about its performance, promising to streamline both risk profiling and case processing.
Aside from the fact that the BETs were frankly daft, both in terms of the questions themselves and their weighting and which the non-HMRC IR35 Forum members had strenuously tried to change, there was a sense of optimism.
For about 18 months, that optimism was justified. HMRC kept to its word and speedily processed IR35 reviews and respected the test scores of the few contractors who chose to take the BETs. Then, according to many service providers delivering IR35 contract reviews and IR35 investigation support, HMRC started to revert to its old ways.
Eighteen months later, and 12 months late, HMRC has published its long-awaited review that has confirmed what we already suspected.
The BETs have been a miserable failure. The external members of the IR35 Forum tried to change the tests’ questions and weightings, but HMRC ignored this advice and pressed on regardless. No surprise then that they did not work and are to be abolished from April 2015.
The guidance has been updated and ported to a new web domain, with some new navigation and a new 20-page guide. Some of that guidance, the scenarios, will be removed with the BETs in April 2015. Is that really the best that 40 IR35 experts can do over two years? Port content from one site to another and change the navigation. What a shocking waste of resources.
In one of only two quantitative studies of new administration in the report, the assessment of the Contract Review Service shows that even fewer contractors are using the service. Why is HMRC in such complete denial about the importance of the helpline and review service? HMRC falsely believe that contractors are not using the service because they think that contractors don’t know it exists. The truth is contractors are not using the Contract Review Service because it would be insane for them to do so.
Admittedly, HMRC might be justified in thinking it has a duty of care to ensure that all taxpayers, even contractors at risk of IR35, should be properly supported. But, when you think about it, the helpline and review service is a ridiculous proposition.
When you use the review service, you are asking someone to give a judgement on whether you should be giving them more money, when their reason for existence is to get you to give them more money. And what you are actually asking them is how you can avoid giving them more money!
How can this be spelt out to HMRC so it can divert the considerable resources the review service consumes into something more constructive? Contractors will spend their resources on asking independent IR35 service providers for their expert support, and rightly so.
HMRC also admits that IR35 investigations are now taking on average longer than they were before May 2012. This suggests that the specialist teams are clearly not working according to plan, either.
Finally, there is no data about the tax yield generated by HMRC as a result of the investigations that have been opened since the new measures were introduced in May 2012. ContractorCalculator has submitted multiple Freedom of Information (FOI) requests for this data, and each time been stonewalled. The reason? That HMRC plans to publish this data in forthcoming reports, although it has not.
Now, the reason that we are interested in the yield is that, presumably, if IR35 is being better administered, then it should be generating more tax because the processes are more efficient.
But then, without any measurable objectives that actually highlight what ‘better administration’ means, aside from those failings highlighted above, it has been difficult to objectively conclude whether IR35 is being better administered or not. However, it is fair to conclude that, subjectively, the entire exercise has not been a success.