HMRC accused of not understanding its own IR35 tax reforms ahead of private sector rollout

MPs also voice concerns about accuracy of status-check tool

MPs have warned the UK government to pay close attention to the effect IR35 tax reforms will have on the private sector, and questioned the efficacy of HMRC's status-checking tool.

Amid much controversy, the government rolled out changes to IR35 – or off-payroll working – rules in the public sector in 2017, and plans to do the same for the private sector in 2020. It shifts responsibility for determining tax status from the contractor to the business that hired them.

The aim is to close loopholes that allow people working through personal service companies to avoid tax contributions, which the government says will cost some £1.3bn by 2023-24.

However, the regulations has been widely criticised for being confusing, hard to implement effectively and linked to people leaving contracting jobs in the public sector.

And in a debate in Parliament late last week, MPs said the government didn't appear to have learnt lessons ahead of the private sector rollout and had failed to incorporate them into an ongoing consultation.

MPs warned that people were unlikely to go to HMRC for extra guidance, that poor application of the rules could damage contractors and the UK economy, and that it placed an extra burden on businesses recovering from the credit crunch and racing to prepare for Brexit.

Labour MP Ged Killen, who secured the debate, cited an IT contractor constituent who argued the rules would play into the hands of major outsourcers.

The contractor said he might be forced to set up an umbrella company to deal with the rules, which would mean passing on increased costs to clients and possibly missing out on work.

"What will my clients do if they cannot source flexible skills in the contract market due to many others doing the same as me?" the constituent was quoted as asking.

"They have two choices: one is to hire an employee, which defeats the 'flexibility' argument. If they cannot hire an employee just for the duration of a project, they will most likely go to a large organisation, such as IBM or Capita who will charge them 2-3 times the contractor day rate."

Should a teacher who consistently fails their own exams be the one chosen to teach the lessons?

Another major concern was that HMRC's Check for Employment Status for Tax (CEST) service isn't fit for purpose. Critics have slammed CEST as inaccurate, and contracting bodies have claimed tests returned incorrect assessments.

Labour's Ruth Cadbury said CEST was "flawed" because it assumes mutuality of obligation. She said "it appears that HMRC does not understand the IR35 rules", noting it had lost about half its cases, including one against Lorraine Kelly last month.

"Given that HMRC loses the vast majority of IR35 cases in court, how can it adequately educate and prepare the entire private sector to accurately assess the status of the contingent workforce?" asked Labour MP Paul Sweeney.

"Should a teacher who consistently fails their own exams be the one chosen to teach the lessons? We must reflect on the complexity and incompetence that pervade the system."

Responding to the criticisms, Treasury minister John Glen said that CEST had been "developed in consultation with stakeholders, including tax specialists and contractors" and that HMRC will stand by its results, if the data had been entered correctly.

Questions have been raised about CEST's testing and development – earlier this year, El Reg reported that the only documentation HMRC has been able to provide on this process is a one-page case list against which it was tested.

Glen told MPs that HMRC would "continue to review and improve CEST" before it is rolled out to the private sector, with "enhancements" due in 2020.

Obviously aware this was vague, he added that he had asked officials for "greater clarity" on this, and that it was likely to mean "improved guidance, better phraseology and improved language that gives greater certainty to individuals who make inquiries".

However, he failed to convince outspoken critic Dave Chaplin, the CEO of contracting biz ContractorCalculator, who said that Glen had given "typical stock responses that we have repeatedly heard from the Treasury". ®