IR35 and 2020: a torrid year for contractors, in review
What a year. Where do I even begin to summarise 2020 for contractors?
I’ll start by stating the obvious.
The past 12 months have been a real challenge for independent professionals, millions of whom have been left to fall between the cracks of the government’s support through the coronavirus pandemic, writes Seb Maley, CEO of Qdos Contractor.
It means that 2020 is unlikely to be a year that contractors -- or anyone else for that matter -- will look back on fondly, with the only real notable positive for independent workers being the delay to IR35 reform in the private sector. But even that was something the government was reluctant to do -- their hand forced when covid-19 chaos ensued in March.
Along with the warmly welcomed one-year deferral to the off-payroll rule changes, there were a number of other notable developments on the IR35-front, which are worthy of reflection before we all put this year firmly behind us.
A rare HMRC victory
In February, broadcaster Eamonn Holmes lost an IR35 tribunal, which carried with it around £250,000 in tax liability. It marked a good start to 2020 for HMRC, although it was a result that worried plenty of contractors, given that the anticipated roll out of IR35 reform in April was then just around the corner. Independent workers feared that a rare victory for the taxman would give HMRC the appetite to hunt down more contractors in the months that followed.
However, as I explained at the time, the clear differences between Holmes and a typical contractor meant that there was little to worry about, assuming contractors had carried out ‘due diligence’ when determining their IR35 status initially.
More recently, in October, it came to light that Holmes has mounted a challenge and will appeal the result, which we await the outcome of.
Firms gear up for IR35 reform
Around the same time as the Holmes verdict, businesses were preparing for IR35 reform. Blanket determinations and contractor bans might have dominated the headlines -- and for good reason Yet across our business, we were pleased to see that many more firms opted for a fair, measured and pragmatic approach to the reform.
Granted, a few businesses then put their plans on ice for a few months, following the deferral that soon followed. But in the large part, it looks as though things might well be different as we close in on IR35 reform’s introduction from April 6th 2021.
A sensational delay
On March 17th 2020, amid the raft of measures announced by the government to firefight the pandemic, was the 12-month delay to the off-payroll framework. This was a sensational development, given we were less than a month away from the anticipated start date of the new rules for the entire private sector. There was a collective sigh of relief -- from contractors, recruiters and businesses, whose priority was (and still is to an extent) to navigate the economic crisis caused by coronavirus.
At the time, the delay offered renewed hope that the reform could possibly even be thrown out altogether, with lobbying bodies increasing their efforts in the months that followed.
Damning House of Lords report lands
Anti-IR35 campaigners were spurred on by the arrival of the House of Lords investigation into IR35, which was published in April - oddly, after what would have been subsequent to the introduction of the changes.
Regardless, this report was damning. The Lords made it clear that the IR35 legislation itself is fundamentally flawed, “riddled with problems, unfairnesses, and unintended consequences.” The government’s approach to reform, which the Lords said creates “zero rights employment”, was attacked too. As was the controversial and unreliable CEST tool -- and rightly so.
2021 rollout appears to be set in stone
In spite of the Lords report, which put forward a compelling case for a total rethink of IR35 and the incoming reform, the peers’ recommendations fell on deaf ears. In July, following a proposed amendment to the Finance Bill which would have seen changes delayed until 2023/24, the majority of MPs rejected this proposal put forward by David Davis MP.
As a result of this failed last-ditch attempt to stop the reform from being introduced in April 2021, the changes were accepted as part of the Finance Bill. In other words, it seems there’s no going back -- that is unless there’s another dramatic and unexpected U-turn. We cannot pin our hopes on that, though.
Another win for HMRC, but only just
HMRC’s targeting of high-profile presenters continued throughout 2020, and the taxman successfully overturned a result at Upper Tribunal. It involved Talksport presenter Paul Hawksbee, who HMRC argued belonged inside IR35 due to the existence of Mutuality of Obligation (MoO) and for the fact that his contract didn’t include the right of substitution.
Ultimately, the Upper Tribunal judge agreed, and Hawksbee was deemed to owe HMRC roughly £140,000 in tax. Similar to the Holmes case, victory for the taxman - albeit a hard fought win - caused concern among contractors, and understandably so.
However, much like Eamonn Holmes, Paul Hawksbee’s contract was markedly different from your average contractor, meaning these two HMRC wins are very unlikely to set a precedent.
HMRC reopens IR35 enquiries
Having briefly paused IR35 compliance activity due to the coronavirus pandemic, contractors started to receive IR35-related correspondence once more from HMRC in the Autumn of 2020.
These contractors in the midst of IR35 investigations were - believe or not - asked by HMRC if they were “ready” to proceed! Saying that, what looked to be a softer, even reasonable approach from HMRC looks to be a red herring. For example, we asked HMRC on behalf of one contractor - who had lost their income due to coronavirus impacts - if the case could be resumed at a later date. The taxman said no, indicating that it’s very much ‘business as usual.’
Frightening CEST data revealed
Moving into December, we caught sight of the latest CEST usage data, showing answers provided by the tool between November 2019 and November 2020.
The information was frightening. It showed that CEST has been used a staggering 975,416 times by contractors, hiring organisations and recruiters in the past year. The tool perceived 52% of these cases as outside IR35, 29% inside but alarmingly, couldn’t make up its mind 19% of the time -- this equates to nearly 189,000 indeterminate answers, leaving thousands of contractors in limbo.
It goes without saying that we continue to campaign against the use of this not-fit-for-purpose IR35 tool, even urging businesses to use anything but just CEST to determine IR35 status.
All eyes on IR35 reform in 2021
Many contractors will be glad to see the back of 2020, even if it does mean that April 6th 2021 - the arrival of IR35 reform in the private sector - is drawing ever closer. And as we head into New Year 2021, the focus of contractors, along with their clients and the recruiters who place them, will turn to the rollout of these changes.
While IR35 reform poses a considerable risk to contractors, particularly if businesses choose to blanket ban or needlessly force them onto the payroll, 2021 does not by any stretch of the imagination spell the end of contracting as we know it.
Speaking from experience, businesses are ramping up their IR35 preparations, with thousands gearing up to assess IR35 status fairly, allowing contractors to continue working compliantly outside the clutches of this legislation. So the contractor sector is surely in for another eventful 12 months, but not like the year we’ve all just endured, please.