IR35: a year in review for contractors

On reflection as we approach 2019, it’s been quite a year on the IR35 front and one that contractors won’t forget in a hurry (despite their best intentions), writes Seb Maley, CEO of Qdos Contractor.

Uncertainty dominated much of 2018 and so for contractors and the thousands of businesses with an interest in the Intermediaries legislation, this year has been a waiting game. As we expected, the government remained coy about the possibility of extending the public sector IR35 reforms to the private sector right up until the last-minute, allowing speculation of ‘will they won’t they’ dominate the build-up to the Autumn Budget in October.

The announcement of the year

The elephant in the room was addressed in the Autumn Budget, and while further IR35 reform wasn’t the announcement anyone wanted, the private sector was at least given time to prepare.

In delaying reform until April 2020 and by making large and medium-sized engagers (not small companies) responsible for setting IR35 status, the chancellor has given these businesses a fair shot at getting ready for changes. It’s now up to them to use this time wisely.

But still no end to public sector chaos

While private sector IR35 changes dominated national headlines, in the background, the impact of public sector changes introduced in 2017 was -- is--  still being felt by contractors.

That’s partly because despite promises from various engagers to administer IR35 accurately and avoid ‘blanket’ decisions, it seems many contractors continue to be placed inside the rules, simply so these organisations can protect their liability. Quite understandably, contractors remain wary about taking on projects in the sector.

Questions remain over CEST’s reliability

CEST -- the IR35 tool used by many public sector engagers -- remains flawed and it came to light earlier this year that it has now been used some 750,000 times. Given CEST presumes Mutuality of Obligation (MoO) exists in all contractor engagements, contractors in the public sector have understandably been wondering whether their IR35 status has been set accurately. The government continues to claim the tool is fit for purpose and maintains it is capable of contributing to accurate IR35 decisions.

Criticism of the tool has not relented, leading HMRC to soften its stance on the tool recently. The publication in November of the IR35 Forum minutes from August spoke of the need to ‘refine’ the tool and HMRC said it would consider including information on MoO on CEST’s online landing page. That’s a contrast to HMRC’s more hard-nosed approach, expressed to ContractorUK in June, that CEST is ‘working well and wouldn’t be changed.’

This waking up of HMRC to smell the coffee is certainly a step in the right direction. However it doesn’t make up for the fact the tool has already been used hundreds of thousands of times, and is extremely lightweight compared to an IR35 contract review.

HMRC’s failures come to light

In 2018, HMRC’s ability to recognise prospects of success faced further scrutiny, after it came to light the taxman had won just one IR35 case this decade. This made the government’s decision to extend IR35 reform all the more alarming, given HMRC seems to have difficulty understanding the very legislation it created and enforces.

A taxman under increasing pressure

HMRC’s approach to enforcing compliance and its lack of cooperation with independent specialists did not go unnoticed this year. It was only a few weeks ago that a Lords report into the taxman’s powers made it clear it believes the organisation has to rethink its approach.

The review did not hold back in its criticism of HMRC. It called on the taxman to ‘urgently review loan charge cases where the only remaining consideration is the individual’s ability to pay,’ and concluded that HMRC’s treatment of UK taxpayers is ‘unfair’, ‘aggressive’ and ‘falls well below the standard set in the Charter.’

In many respects, the Lords report was a breath of fresh air and brought many of HMRC’s failings to light. The onus is now on the government to take these concerns seriously and introduce real, tangible, visible change in 2019.

A second IR35 consultation

Immediately after Budget 2018, a second IR35 consultation was announced. The government has said it will address concerns over CEST’s reliability, outline the consequences of an engager failing to take ‘reasonable care’ when setting IR35 status and provide details of a course of action contractors can take when they do not agree with an engager’s status decision. This lack of appeal in the IR35 reform framework troubled contractors back in February 2017; and still troubles them today, especially as in July it was pointed out that engagers face a penalty if they wrongly deem their PSCs ‘outside’ IR35, but face no penalty if they wrongly deem their PSCs ‘inside’ the legislation. 

As regards the 2019 IR35 consultation, it is expected to be published early in the year, and will no doubt set the tone for much of the discussion around IR35 in 2019, which will be a vital 12 months in ensuring the private sector is ready for the arrival of reform from April 2020, and its enforcement in the years to come.