Where HMRC's new IR35 consultation is less than honest
The unsurprising part of HMRC’s Off-Payroll Working consultation is its lead option to extend the public sector’s IR35 changes to the private sector, but the surprising part is just how many big untruths the document contains, writes Matt Boddington, director at employment status specialists Chartergates.
And yes, reassuringly, the April rules will possibly be adapted to reflect that the government is “committed to learning from the experience of the public sector implementation.”
But no, this isn’t one of the document’s fundamental falsehoods (just in case you were wondering). Although there are five major ones I am going to outline.
Before those, and contrary to the first-hand experiences of many tax, recruitment and contracting commentators, the consultation opens with a self-congratulatory analysis of how well the public sector IR35 reforms have bedded in.
The combination of an additional tax take of £410 million in its first year, and estimated wider non-compliance in the private sector mean that the dice have probably been cast. Wholesale reform to IR35 in the private sector is inevitable.
But as mentioned, the HMRC consultation also explicitly features a number of dubious premises, ranging from the convenient omission of inconvenient truths, to downright duplicity.
1. ‘HMRC’s online status tool reflects case law’ (Consultation Ref: 4.25)
It doesn’t. The Check Employment Status for Tax (“CEST”) tool developed in conjunction with HMRC lawyers gives no weight to the mutual obligations to offer and accept work that are inherent in an employment contract.
Our analysis of the IR35 case law – which we ran as far back as December 2016 -- clearly demonstrates the approach adopted by the tribunals.
Despite this, HMRC still claims today in May 2018 that the CEST tool is accurate and reflects case law. The tool is HMRC’s bedrock for the approach to compliance in the public sector. Its inaccuracy is worrying.
2. Half the time (at least), HMRC gets IR35 wrong
Based on the reported case law (to date), the Revenue has a 50% fail rate. Put another way, HMRC have lost as many reported litigated cases as they have won. This is a glaring omission from the consultation. It not being mentioned at all calls into question other claims underpinning the reform, for example that 90% of PSCs don’t comply with IR35. Presumably, then, that should be 40-to-45%?
3. ‘IR35 is decided by the working practices which the end-user can best determine’ (2.3; 3.11)
No decided case has ever approached the IR35 test in this way.
The IR35 legislation requires a hypothetical contract to be constructed having regard to the contracts forming part of the overall arrangements. In every decided IR35 case, the tribunals have considered the express contracts between the end-user, the agency, the PSC and the worker and have used these to build a fictional set of terms that would have been agreed had the worker been engaged directly by the end-user. While working practices might be relevant, they often do not elucidate the full picture and largely ignore the important legal test of whether the individual is providing the services ‘in business on their own account’.
This is not simply splitting legal hairs -- the public sector reforms have put the end-user in the invidious position of having to reach a potentially complex decision without reference to all of this information, before the work actually starts, or they risk becoming liable.
4. Glossing over Employer’s NIC
The public sector reforms introduced the concept of a “Fee-Payer.” This is the person physically paying the PSC who is responsible for actually operating IR35 and deducting PAYE. Most PSCs obtain their business via agencies, and an agency is therefore typically the Fee-Payer.
HMRC adopts and justifies this approach because the Fee-Payer has the opportunity to deduct PAYE from the payment to the PSC. However, under the reforms, the Fee-Payer becomes the ‘disguised employer’ and is responsible for paying over employer’s NIC. There is no statutory right to actually deduct this employer’s NIC liability from the fee paid to the PSC. So where an agency is in the middle of a ‘disguised employment’ scenario, it bears the brunt of liability. So not the disguised employer, nor the disguised employee.
5. ‘The Fee-Payer must follow the end-user’s view’ (6.10)
This is a separate HMRC falsehood, exposed by the consultation document.
Since the April 2017 introduction of the new public sector rules, HMRC have insisted that the Fee-Payer is obliged to follow whatever conclusion the end-user reaches on IR35 status. This is not, however, how the legislation operates. Some agency Fee-Payers who disagree with the public authority’s IR35 status conclusion have, quite legally, not operated PAYE. This is unsurprising given the potentially unjustifiable employer’s NIC liability they would incur as mentioned above, not to mention the disharmony it would create in the relationship with their candidate by incorrectly operating IR35.
HMRC’s guidance states that the public authority decides if the rules apply, and the Fee-Payer must follow that decision. HMRC have asked some agencies to sign an undertaking that they understand they are obliged to follow the public authority’s conclusion, despite this not being law.
HMRC’s position on this important point is exposed by the consultation document. Question 8 asks whether the public sector legislation should be extended so that there is an obligation on the Fee-Payer to adopt the end-user’s conclusion. In consulting on this extension to the existing reform, HMRC are admitting that no such obligation currently exists.
I could go on…
The above is only a shortlist. It features just the clangers, five of the most fundamental flaws in HMRC’s private sector IR35 reform consultation. The list could be made much longer.
These ‘deficiencies’ behind HMRC’s ‘lead’ proposal are troubling in isolation; they are even more so when combined. Forcing a snap decision by end-users based on only partial information; dissecting the employer’s NIC liability from the decision-making process; providing no right of appeal or redress within the rules for ‘over-compliance,’ and providing a deficient status tool are a recipe for yet further IR35 disaster.