HMRC’s evidence to Lords IR35 inquiry is published

But the tax office's submission doesn't tell the full story of IR35 reform to date

HMRC has submitted its written evidence to the Lords inquiry into IR35 reform in the private sector, claiming it’s too early to assess the impact of the changes, that CEST is fit for purpose and that the reform has only impacted 180,000 contractors. 

In October, the House of Lords Finance Bill Sub-Committee launched its follow-up IR35 inquiry, where it invited interested parties to share their view of IR35 reform, which was introduced on 6th April 2021. 

From asking if the changes have made it more difficult for businesses to engage contractors to exploring the effectiveness of the government’s IR35 tool, CEST, this inquiry will build on the findings from the investigation into public sector reform in 2017.

In this article we explore the main talking points from HMRC’s eagerly anticipated submission.

‘Too soon to say’ if reform has created difficulties 

Throughout the document, HMRC says it is ‘too soon’ to evaluate the impact of reform, often in response to questions relating to the perceived challenges faced by contractors and businesses. 

This has caused some controversy, particularly among contractors, one third of whom (surveyed by Qdos upon the introduction of the changes in April) reported being 

placed inside IR35. 50% of this group planned (39%) or were considering (11%) challenging their client’s decision.

Further research, conducted by trade body IPSE, suggests that 35% of contractors have quit contracting because of IR35 reform, opting to go employed, work overseas or stop working altogether.

180,000 contractors impacted by reform

HMRC claims that approximately 180,000 contractors have been affected by the introduction of reform in the private sector, along with 60,000 medium and large businesses and 20,000 employment agencies. 

However, given that recent government figures measure the umbrella workforce at 500,000 (a way of working inextricably linked to contracting and IR35) the 180,000 figure touted seems wide of the mark. 

HMRC expects to net £3.8bn by 2026

IR35 reform will earn the Treasury an extra £3.8bn by the 2025/26 tax year, according to HMRC. While these predictions may be realistic - as more contractors are either deemed inside IR35 or operate on the payroll - the number of blanket IR35 determinations and PAYE-only ultimatums being issued to contractors casts doubt over how much of this additional revenue is justified. 

Taxman claims it will ‘always stand by CEST’

On more than one occasion HMRC says it will or has always stood by results delivered by the government’s IR35 tool, CEST, “provided the information entered remains accurate and the tool is used in accordance with our guidance.”

This offers a false sense of security to businesses relying on the tool. For example, HMRC handed NHS Digital a £4.3m tax bill after it was decided that this department of the health services had engaged contractors under the wrong IR35 status - based on answers provided by CEST. 

HMRC claims victory in PGMOL

One of the many issues IR35 experts have with CEST is that it’s not aligned with IR35 case law. For example, it largely overlooks one of the key IR35 status tests, Mutuality of Obligation (MoO), presuming that it exists in every engagement. This is despite recent IR35 cases being won on MoO not being present.

An ongoing employment status case (PGMOL v HMRC) hinges on whether MoO exists in the relationship PGMOL held with 60 professional football referees. While the Court of Appeal recently instructed the case to be reheard at the Upper Tier Tribunal, if HMRC was to lose this case it may give many contractors grounds to appeal IR35 decisions based on CEST.

In its evidence, the tax office states that the Court of Appeal judges agreed with their view of MoO. In reality, this debate wasn’t explicitly held, with the case to be reheard in due course. 

HMRC talks up its IR35 support services 

When asked by the Lords how well HMRC has supported businesses with the implementation of reform, the tax office pointed towards 57 webinars, over 100,000 emails, letters and messages, and 949 telephone calls with the largest businesses in the lead up to 6th April 2021. 

Even so, there are concerns regarding the quality of this support. An indicator of this is the 56% of contractors who, immediately after the arrival of reform, told Qdos they had not yet received a Status Determination Statement (SDS) from their client despite it being a legal requirement. 

Further promises to tackle non-compliant umbrella companies 

In response to IR35 reform, some businesses have needlessly insisted that all contractors operate via umbrella companies, where the rules are no longer a consideration. As a result, more contractors now operate via umbrellas. But while there are plenty of compliant umbrella providers, the fact that the industry remains unregulated is a major worry. 

While different ways HMRC plans to tackle the proliferation of disguised remuneration schemes (which pose a danger to contractors) are welcome, many will feel that regulating the industry is the only way forward.

To round up, many will feel that the tax office’s written evidence falls short, as our CEO Seb Maley, told The Freelance Informer:

“The tax office says it’s too early to assess the impact of the changes and if reform has made it more difficult for firms to engage contractors. It’s not too early. While more firms are getting to grips with reform, the fact of the matter is that it's created challenges and resulted in contractors being forced onto the payroll.”