UK taxman told: IR35 still isn't working in the public sector, and you want to take it private?

Status-checking tool isn't fit for purpose, and then there's Brexit

The UK's taxman, HMRC, is under pressure to rethink "short-sighted" plans to extend IR35 tax reforms to the private sector and scrap its "unfit" assessment tool as a consultation on the matter closes today.

The government is tightening up tax rules on off-payroll working to squeeze contractors for a bit more cash. Broadly, it will shift the liability of determining contractors' IR35 status from the contractors to the organisations hiring them.

It started with the public sector – which reportedly caused a mass exodus of IT contractors out of government – and is now moving on to the private. It is estimated this could affect some 5.7 million businesses and 2 million contractors.

A consultation on the plans was launched in May, and closes just before midnight tonight. In it, HMRC estimated that just 10 per cent of the Personal Service Companies that should apply the legislation actually do so. The cost of non-compliance is expected to rise from £700m in 2017/18 to £1.2bn in 2022/23.

However, contracting services firm Qdos Contractor this week warned that the government isn't looking at the bigger picture – especially with the UK's impending exit from the European Union.

"With the IR35 consultation drawing to a close, it's vital the government carefully examines the wider implications of further changes," said CEO Seb Maley.

"Reform – should it mirror the public sector – has the potential to impact the entire UK economy. Amid Brexit uncertainty, independent contractors and the flexible labour market are essential to the competitive economy we need."

Maley also pointed to problems implementing the reforms in the public sector, saying that many contractors are wrongly placed inside IR35. HMRC recently lost a case where it was demanding £26,000 in back taxes from a public sector IT contractor the taxman said fell into the net.

"To extend reform when the dust clearly hasn't settled on public sector changes would be short-sighted," said Maley.

"The government must prioritise sorting the chaos caused by public sector reform before announcing private sector changes."

Maley added that, if the plans were to go ahead – which he said might risk losing the support of contractors altogether – the planned 2019 rollout "would be premature". Businesses need more time to prepare for making accurate IR35 decisions on a large scale, he said.

Ahead of the public sector reforms, the government launched a tool – Check for Employment Status for Tax (CEST) – for organisations to assess IR35 status, but it was slammed as inaccurate.

HMRC alluded to this in its consultation document, saying that a "considerable proportion of public authorities did experience early difficulties in complying with the reform". One reason cited was "familiarisation with... HMRC's CEST service, although it was found that the functionality of CEST had improved for public authorities over time".

However, freelance advisory service ContractorCalculator this week published a white paper co-authored by Philip Manley, a former HMRC inspector, who brands CEST "not fit for purpose".

The paper identified what it describes as 10 key failings, including the fact it asks just 16 questions – inspectors would ask around 50 to 100 when conducting an inquiry – and that it was not formally tested by the Government Digital Service.

It also brands it "hopelessly unreliable and biased", citing an investigation ContractorCalculator carried out by testing the tool using previous cases, which found it returned a flawed assessment in 42 per cent of cases.

A further criticism was that HMRC has not included "key elements of status law", such as a test for Mutuality of Obligation – which refers to the obligation of an employer to provide work and the employee to accept it.

Without this, the contract will be outside IR35 – but HMRC has assumed it is present in all public sector contractor engagements.

"Unless HMRC can disprove the substantial evidence demonstrating CEST's shortcomings, then it's clear that CEST is not fit for purpose," Manley said.

The Association of Independent Professionals and the Self-Employed (IPSE) said: “Taxing more self-employed people as if they were employees – without giving them any of the employment benefits – would only add to [tax confusion] and further complicate this tangled issue. Therefore, with Brexit hanging over the country, IPSE’s response to the government’s consultation was clear: don’t do it, and definitely don’t do it any time soon.” ®