5 tax and IR35 ideas to make 2023 better for contractors
Given the uncertainty this year with IR35 reform repeals and Managed Service Company enquiries from HMRC, we are hoping that 2023 brings with it some much needed certainty and clarity for contractors, writes David Harmer, associate director at Markel Tax.
My wish list for 2023 for the contractor sector may not seem very appealing at first – and if granted, it would see increased activity from HMRC and focus on compliance. But bear with me, there is method to my madness!
1. IR35 Chapter 10 /off-payroll enquiries: HMRC should show its hand in 2023
Spurious tax enquiries help no one, least of all contractors. But the Chapter 10 ITEPA 2003 off-payroll private sector implementation has not been plain-sailing to say the least, and given the recent repeal of the repeal, I can’t help but think HMRC needs to show their hand.
It has been widely reported that compliance activity started in September 2021, but despite accountancy body the ICAEW publishing the Revenue’s opening salvo – its introductory compliance letter, there has been no real detail of how these checks have panned out, from either an end-client or HMRC perspective. Of course, we have seen the massive penalties in the public sector, but as ContractorUK contributors have correctly observed of late, private sector enquires are likely to run very differently and with more rigorous defence against HMRC “opinion”.
What is needed is for HMRC to be seen to be utilising Chapter 10 legislation proactively: to give clarity around why and how they will begin an enquiry. For my part I’d like them to answer that, in light of the initial compliance letter, does that mean HMRC will always reviews end-clients, or could compliance activity start with the ‘fee payer?’.
Similarly, is it part of a wider plan that HMRC have appeared to focus on specific industries first, like Oil & Gas, Banking & Finance? Do they consider these sectors to be more at risk than others? Or is it simply a numbers’ game – in terms of revenue and contractor targeting?
An active HMRC, which shows its hand to taxpayers and policymakers, will improve the IR35 landscape in two ways.
Firstly, it will provide necessary clarity around how HMRC utilise the legislation itself. Impact assessment versus what’s actually happened, any unforeseen consequences, lessons for legislation in the future – areas that all parties could find illuminating.
Secondly, HMRC showing its hand would encourage those end-clients which have not engaged with the legislation to sit up and take stock of their contractor workforce correctly.
This sitting-up process would only improve the quality of IR35 decision-making, the content and manner in which Statement Determinations Statements are issued and therefore provide greater clarity for contractors and reduce potential challenges to those decisions. That is surely a win-win for all parties. It should also give fee-payers (agencies) confidence in the determinations being handed down (given that they hold the liability), allowing them to concentrate on securing the best contractors available. Why they got into the staffing business in the first place, perhaps?!
2. CEST: Why only overhaul (not update) will suffice in 2023
HMRC’s CEST tool has come under much criticism since its launch in March 2017, and for good reason.
The application of CEST in the ‘real-world’ of contracting is limited, and Mutuality of Obligation remains noticeably absent from its question set – the assumption that MOO exists simply because there is a contract, work has been undertaken, and fees paid in consideration for that work is not the case law definition of MOO.
And I’d like to add that a sensible decision on Mutuality in the so-called ‘referees’ case’ (HMRC v PGMOL) needs to be handed down in 2023, to prove that point!
A related wish, if I may. Should HMRC genuinely believe CEST can be a reliable, indicative tool for end-clients, then it is time they invested serious resources into overhauling the tool. Preferably we would like to see a complete makeover of the tool, rather than simply the type of “update” we have seen previously.
3. End-Clients: sit up, smell and sip the not-going-anywhere coffee
An engaged HMRC which shows its hand will help, but what is also needed is active end clients and their total engagement with all things IR35/off-payroll.
While a great many organisations have proactively tackled their legislative obligations, there still remain many who have not.
Uncertainty over determination of IR35 coupled with fears of liability for getting it wrong, have seen many organisations taking the decision to make a blanket ban on engaging contractors through PSCs. Or they’ve delivered “inside IR35” determinations where professional advisers would consider the engagement to be outside of IR35. Moreover, it seems many contractor “disputes” have not proved successful for these taxpayers.
We would like to see all end-client organisations actively engage with both the legislation and their contracting workforce. For clients, this will undoubtedly mean they will go on to attract and retain the best contractor talent, and maintain the agile workforce they want (and again, organisations could provide some much-needed assurance for the fee payer agencies in the chain.
Now we know thanks to the current chancellor’s reinstatement of the 2017 and 2021 off-payroll rules that the frameworks aren’t going anywhere, surely it’s time the small but significant proportion of end-users hoping IR35 reform will simply go away changed tack, and fronted up to their responsibilities. Especially if they don’t’ want to their future projects to be mothballed!
4. Managed Service Company (MSC) enquiries: taxman needs to iron out issues
In 2022, contractors were landed with determinations under the MSC legislation of 2007, which came as quite the shock to many.
While HMRC provides guidance on the legislation itself and how it may apply to managed service companies providers; awareness of the legislation and its debt transfer regulations, and the official guidance to contractors, is lacking. Considering it is the PSCs which hold the liability, this is an inadequacy which HMRC should address.
There’s a bit more for HMRC to iron out too. On the one hand, the tax department has been heavily promoting the transfer of records and information online, relating to Making Tax Digital. On the other however, the Revenue has taken issue with the use of online portals offered by accountancy service providers to make their clients’ bookkeeping easier -- with no clear explanation as to why.
Ultimately, however, we would like to see a tribunal decision, specifically one which (unlike the Costello/Christianuyi case) clarifies the law around what turns an accountancy practice into a Managed Service Company Provider, and how the accountancy “exemption” is applied. Judicial clarity on the application of those provisions is essential for contractors and accountants alike. I did say back in August 2022 that 2023 could be the year of (some) resolution for MSC contractors. And I’m still hopeful that’s the case.
5. HMRC: use the Christmas break wisely
Finally, but I acknowledge probably the most unlikely wish of mine to be granted this Christmas, we would like to see an improved HMRC.
From our experience of dealing with HMRC enquiries, we have seen a significant decline in the effectiveness of HMRC in how they deal with matters.
We have seen timescales becoming longer, multiple changes in case workers over very short spaces of time; unwillingness to deal with case law, inconsistency in approach from office-to-office (and officer-to-officer). And we could go on. The centralisation of various departments and closure of HMRC offices has likely caused some of the problems, but not all.
So in 2023, we would very much like to see the return of a taxpayer-focussed and fully resourced HMRC. Where the taxpayer’s charter is actively followed; sensible conversations with technically trained HMRC officers can take place, and where HMRC’s attention is on the resolution of an enquiry as opposed to issuance of protective determinations year-on-year. This can only happen if HMRC takes stock and gets their house in order – something that surely the Christmas break affords it time to do. I know contractors; we can but wish.