HMRC publishes IR35 reform research deemed questionable, tedious, and wide of the mark

HMRC has found that just 130,000 limited company contractors got hit by IR35 reform.

The finding is just one of many that leading experts on IR35 say must be taken “with a pinch of salt” (Qdos), or almost dismissed for being “questionable” (Bauer & Cottrell).

Even HMRC itself concedes that readers of a report it published in December containing the findings, “should take the estimates set out in this publication as indicators only”.

'Wide of the mark'

Such a big caveat by HMRC – and its outright admissions like “we have not been able to quantify these savings,” aren’t good enough to off-payroll rules specialist Nicole Slowey.

“According to HMRC…130,000 contractors have stopped [PSC] working due to IR35 reform and now operate on the payroll. [Yet] this figure [isn’t an indicator; it’s] wide of the mark”.

Operations director at Qdos, Slowey also said people will be “left wondering” how many of the 130,000 contractors were subjected to “incorrect” IR35 status determinations.

'Contractors now paying unnecessary employment taxes'

HMRC choosing not to produce findings on incorrect determinations, nor even acknowledge ‘wrong’ SDSs could have affected the 130,000, isn’t lost on IR35 expert Matt Fryer.

Managing director of People 2.0 company Brookson, Mr Fryer said: “A significant number of the 130,000 individuals who have been moved to payroll as a result of the reforms may have had contracts incorrectly categorised as inside IR35 and are now paying unnecessary employment taxes.

“[But in the report] HMRC seems keen to highlight that this represents just 2.5% of the total self-employed workforce, and less than 1% of the total workforce. Is this an indication that the government is content with the unfairness of this outcome?”

'Read between the lines'

Fryer believes readers of ‘Impacts of the off-payroll working rules reform in the private and voluntary sectors,’ have to “read between the lines” to get the “full picture” of IR35 reform.

But at Qdos, chief executive Seb Maley said the “full story” for the UK since the April 6th 2021 off-payroll rules took effect just isn’t something that the report comes close to telling.

“Read this report and you’d think that the off-payroll rules have been plain sailing. It’s another government study to add to the growing pile of those which fail to reflect the reality of the situation. 

“We’re…told [in the HMRC report] that half of businesses have found it ‘easy’ to comply with the off-payroll rules, and that around eight in ten firms assess IR35 status on a case-by-case basis.”

'HMRC painting a nice picture'

An IR35 contract reviewer, Mr Maley continued: “These statistics paint a nice picture, but I would take them with a pinch of salt. True, more businesses are getting to grips with these rules, but it’s been a difficult journey. 

“The fact of the matter is that this study conveniently suits the government’s narrative around the off-payroll working rules, which is that there has been minimal disruption.”

Paraphrasing that government narrative is Kate Cottrell, the co-founder of status advisory Bauer & Cottrell.

“The findings that are being sought here can be summed up as ‘everything is great;’ ‘CEST is wonderful’ and a majority found the whole thing ‘easy to implement,’” she told ContractorUK.

“However the findings of all those who have properly reviewed IR35, ranging from the Public Accounts Committee to the House of Lords without exception found the opposite of ‘everything is great;’ ‘CEST is wonderful’ and the rules are ‘easy to implement.’”

'Tedious'

A former inspector of taxes, Cottrell explained why the study’s findings and the HMRC report is “questionable,” and why the latter from her old employer makes a “tedious read.”

“To make this research have any value, you cannot limit it to asking just one party that has been affected by IR35 reform, even if you are only seeking short-term effects,” she began. 

“For starters ask contractors how easy it was for them; ask all the accountants how many contractors they have lost and ask all the umbrellas how much new business they have gained.

“Ask too the agencies how their client and contractor bases have changed; ask all the trade bodies, insurance providers and accountancy institutes how IR35 reform has been for them.

“Ask further for some statistics from those running their own IR35 status tools; ask the IR35 and off-payroll specialists who see the issues from every side. Above all, ask how much it has cost in terms of time -- and money -- for all concerned.”

'Astonishing'

The research firm commissioned by HMRC, IFF Research, says that it ran a “telephone survey” of 353 organisations and did “follow-up” interviews with 39 of those participants.

“My suggestions of who to ask and what, would result in evidence from tens of thousands of real-life experiences, versus these 353 calls and 39 follow-up interviews,” Cottrell reflected.

Sounding disappointed, she continued: “It really is time for some balance, to seriously establish the short-term effects and of course the longer-term ones [of IR35 reform] right up to present day. 

“A key question [for any such serious attempts to probe the 2021 and 2017 off-payroll rules] is how much HMRC has spent on it all. Noticeably absent from this report, I suspect it will be an astonishing amount.”

'One-off costs of IR35 reform, further to first-year operating costs'

Astonishing to some in the contractor sector will be the small volume of workers affected by IR35 reform, who HMRC says used disguised remuneration schemes as a result -- just 500.

Other amounts in the Revenue’s report and adjoining study will raise eyebrows too.

Client organisations have incurred an overall one-off cost of “£90million to £230million” to implement the IR35 reforms of April 6th 2021.

Clients have also spent a “further £150million to £370million” in the first year on operating the rules.

HMRC says it expects these first-year operating costs to “reduce over time,” but no timeframe was given.

'Only a subset of PSCs affected by the off-payroll rules'

Similarly unspecified, HMRC says the savings to PSCs with medium or large clients, who no longer need to decide their own IR35 status, cannot be quantified.

But overall,  PSCs are apparently more likely to be unaffected by the April 6th 2021 rules than affected, as the framework impacts “only a subset of the wider PSC population”.

The Revenue’s report further claims that the 2021 reforms are estimated to have generated an additional £1.8billion in revenue for the tax year following the reform as well as 18 months prior to its introduction.

'Despite the usual analysis, nothing then was normal'

HMRC adds: “We are confident that we have seen an increase in overall tax paid by those who were most likely to be working through a PSC prior to the reform.”

But even the time-period measured by HMRC is off.

“[The IFF Research commissioned by the Revenue] covers the period September 2021 to March 2022. That’s only six months into the private sector reform and hot on the heels of the covid pandemic – a time when arguably nothing was normal,” said Cottrell. 

The IR35 specialist further reflected to ContractorUK: “Nonetheless we’re given the usual statistical analysis, which simply favours the narrative that [the government wants]. No doubt it is possible to trawl though these 68 pages and pick out statistics that support the contrary view, but life is too short. Here’s to the New Year and hopefully a repeal of the rules.”

In its report, HMRC says that understanding the impacts of IR35 reform “continues to be a priority for the government.”