Contractors, here's when the true impact of a new IR35 will become clear
At this 11-week point since private sector IR35 reform applied, there are quite a few studies, surveys and snapshots doing the rounds, all trying to evaluate the impact of the off-payroll rules with particular focus on how many are inside IR35, how many are outside and how many have been forced into umbrellas, writes Kate Cottrell of status advisory Bauer & Cottrell.
Studies, surveys and snapshots (cont.)
We are less than two months in and to use a phrase that is a favourite of HMRCs “we have heard anecdotal comments, but we have no evidence.”
At this still early stage, the findings of the studies are limited, as to who took the time to complete them, and the nature of the business asking the questions (are they a contractor membership body, an accountancy practice specialising in contractors or an agency with the same specialisms?)
I think you could ask both contractors and every provider of services to contractors what they are seeing and without doubt, there will be horror stories -- those out of contract; those forced to contract in a particular way, those that have been treated well and fairly, those in no man’s land still awaiting the result of their status appeal. And even sadly, those who are still unaware of the whole thing!
These studies, surveys and snapshots will undoubtedly assist those that undertook them to make their case to government and it will be interesting to see the picture when we are further down the line.
The use of tools
At present, there are some tools to decide IR35 status which will have a very accurate picture of the results of the reform thus far. However, many I have seen do not do a proper job at all -- with the worst testing tools just giving indications of the likely status. These indicators are of no use to anyone.
As we know all too well, HMRC regularly quotes the millions of times CEST has been used and, as with any statistics of this type, the department paints the picture that such numbers mean that the tool is ‘really successful.’
In reality, these are just numbers with no account being taken of folk using CEST over and over again until they achieve the right result -- or the most worrying aspect of the result that gives the answer “unable to determine”.
Even non-users know that CEST does have its limitations and arguably, it is not fit-for-purpose. There is currently no requirement to even identify the parties to the engagement!
HMRC have said they will stand by the results of CEST providing that the information input is accurate and herein lies an aspect of CEST, that needs great care. Unless you are 100% certain that it has been completed accurately, then reliance upon its results is not recommended.
When can we expect anecdotes to become facts?
HMRC will have a very clear picture of the impact of the rules during and after the end of the tax year.
- Information on those inside IR35 is being returned to HMRC via RTI – ‘tick the box please.’
- Information on any contractor working via an agency and being paid gross (outside IR35) is also returned to HMRC by way of the Intermediaries Reporting requirements.
- Self-Assessment returns will pick up outside IR35 contractors that do not fall within 1 or 2 above.
These 3 channels will provide the bulk of IR35 reform facts to HMRC.
How will the facts be viewed?
I hope we have moved some way since HMRC claimed (based on very dubious research) that the reform was a resounding success in the public sector.
Yes, the Revenue will have an awful lot of data and we can only hope that this will be presented in a fair way, rather than like the past when it was presented to support the introduction of the reform – à la ‘we were right to do this – look how much tax and NIC we have collected.’
As always, the difficulties will arise if no account is taken of behaviours. Without this, the facts will belie the truth. HMRC will need to identify industry sectors and the stances taken by end-clients, especially the large ones. These include:
- Blanket bans i.e. ‘no more PSCs’
- Blanket Umbrella-only contractor usage.
- Blanket Inside IR35 decisions i.e. ‘all PSCs are caught.’
- Incorrect decisions, changed on appeal
If the contractor industry and the wider business community like UK PLC are to have any faith in the system HMRC /HMT must not just add up the totals and claim a resounding success -- however tempting that might be for them. Instead, account should be taken of the effects of the Covid 19 pandemic on the new rules. Many businesses have behaved differently as a result. This includes many contractors who have been put out of business owing to lack of support from HM Treasury.
Everyone needs to carry on and continue to keep evaluating the impacts
It’s not a popular action to endorse but end-clients may need to return to their invariably commercial-led decisions to ban PSC contractors. All other intermediaries such as agencies and umbrellas may need to change tack on their operations. Contractors should understand the new rules and challenge unfair or poorly made decisions wherever possible. Finally let’s keep the studies, surveys and snapshots coming regularly, collecting the information that will turn anecdotes into reliable facts.