Qdos Contractor’s IR35 consultation response

In the public sector, thousands of contractors have been incorrectly placed inside IR35

With the IR35 consultation now closed, the Government will review the various responses in the coming months before returning with the draft legislation for private sector IR35 reform, which is set to be rolled out in April 2020.

HMRC opened the consultation in March with the aim of gathering feedback from parties with an interest in the IR35 legislation. As part of our responsibility to represent the contracting community, Qdos put forward a number of suggestions for HMRC to take into account.

Now is not the time for IR35 reform

Above all else, Qdos made it clear to HMRC that extending IR35 changes to the bigger and more diverse private sector is not the answer to stopping what the Government believes is widespread non-compliance.

At a time of significant uncertainty, the UK’s independent workforce is vital - for the flexibility, productivity, growth and overall economic contribution of the private sector. To introduce IR35 reform - when there is no proof it has worked in the public sector - would be short-sighted.

However, if the Government insists on pressing on - and given HMRC is of the belief that public sector changes have been successful - lessons must be learned and the taxman needs to listen to IR35 specialists and those who know the legislation best.

In our IR35 consultation response, amongst other points, Qdos suggested the following to HMRC...

HMRC must offer genuine guidance

A lack of understanding among public sector bodies contributed to a number of blanket and ultimately risk-averse IR35 decisions. This serious problem is one of the reasons why Qdos, along with a number of other IR35 specialists, is calling on HMRC to better support the medium and large private sector businesses that from next April will be administering the IR35 rules.

Our quarterly research showed that 92% of more than 1000 contractors still haven’t heard from either their client or recruitment agency with regards to next year’s changes. This suggests these parties either haven’t started their preparations or perhaps view blanket decisions as an appropriate course of action.

Therefore, we urged HMRC to offer private sector companies the support they clearly need and would welcome. Fail to do this and the private sector runs the risk of making panicked and incorrect IR35 assessments.

Qdos advised:

“If reform is to be implemented from April 2020 whilst there is still such an extensive lack of knowledge, we are likely to see many status decisions not being made on genuine employment status, but with uncertainty, fear, and confusion - as was the case when the rules were introduced in the public sector.”  

Clarify ‘reasonable care’

TheIR35 legislation states that ‘reasonable care’ must be taken when setting status. What this means specifically, however, is unclear. Currently, there is no explicit definition of ‘reasonable care.’ The very fact that it’s open to interpretation means that end-clients could continue to apply blanket rulings - an approach which is non-compliant and could have significant financial consequences for engagers, agencies and contractors.

Given the confusion surrounding this - which impacts all parties in the supply chain - Qdos has urged HMRC to clarify the term before private sector changes are enforced.

Qdos advised:

“‘Reasonable care’ must be clearly defined and set out in legislation to clarify what is reasonable care and what is not. Examples of what HMRC deem ‘reasonable care’ to mean would be useful to further demonstrate this and where the liability would lie in each scenario.”

Design a fair appeals process

In the public sector, thousands of contractors have been incorrectly placed inside IR35, leaving them taxed at a similar rate to employees. Without a formal appeals process to help contractors challenge and overturn what they suspect to be an inaccurate status assessment, these workers have little choice but to accept their client’s decision or walk away from the contract.

To combat this problem, HMRC proposes that the end-client should provide the reasons behind an IR35 decision to the contractor and the fee-payer. While this would offer greater transparency, Qdos feels that a standardised external appeal process should be introduced. That 86% of contractors surveyed by Qdos will challenge inside IR35 decisions highlights the importance of this.

Qdos advised:

“All workers must be entitled to a fair and objective appeals process where the decision is based on employment status, not on a client’s reluctance to accept risk.”

CEST must be enhanced

There are still major concerns about the reliability of HMRC’s IR35 tool, CEST. While HMRC has promised to work with stakeholders to improve the tool - which ignores Mutuality of Obligation (MoO) and relies on just 16 questions before delivering an answer - we are yet to see any significant enhancements in the two years it has been in operation.

Despite the fact CEST isn’t mandatory, HMRC must deliver on its promise to refine the tool, given that it contributes to many thousands of IR35 decisions. Currently, there’s little evidence to suggest that an answer it provides will stand up in an IR35 court case. With under a year to go until private sector changes arrive, HMRC needs to focus on CEST’s failings.

Qdos advised:

“CEST still ignores important elements of case law upon which status must be determined. Its holes create a huge disparity between CEST’s own logic and the manner in which a decision is made in reality.”

Align tax status and employment rights

Even before the introduction of public sector reform in 2017, contractors were calling for employment rights when operating inside IR35. To tax contractors as employees but not offer them rights in return is not only unjust, it also contradicts the Government’s pledge to support the independent workforce. This is an issue that has to be resolved before the introduction of changes next year.

Qdos advised:

“To move forward with IR35 reform in the private sector without considering a change to the rules to allow contractors to receive employment rights (if placed within IR35) would be breaking the Government’s promise to support small businesses, and we are likely to see many more workers attempting to claim employment rights, should reform be implemented without resolving this issue.”

With the ball firmly back in HMRC’s court, it’s important the Government takes the advice of IR35 specialists seriously as it draws up the draft legislation, which is expected to be published this summer.