HMRC’s new IR35 framework, with its business entity tests, example IR35 scenarios, helpline and guidance, has not provided limited company contractors with the certainty they were seeking from the improved administration of the tax legislation.
However, Office of Tax Simplification (OTS) Tax Director John Whiting told ContractorCalculator that contractors should “wait and see” as “the new framework and related admin changes are promising and we should give it all a try”.
PCG’s Head of Public Affairs Simon McVicker has confirmed that the policy debate continues on behalf of contractors at two levels: “We will continue to work with HMRC through the IR35 Forum,” he told ContractorCalculator, “and with policymakers at Westminster via the All Party Parliamentary Group (APPG) on the Freelance Sector and the backbench community.”
And Andy Vessey of Qdos Consulting, who attended an HMRC IR35 operational approach meeting just before the tests were published, remains convinced that HMRC is genuine in its desire for feedback on how the new framework works in practice: “There is scope and a willingness on the part of HMRC to learn and adjust the tests to deliver greater certainty."
Tax status certainty for contractors was a key objective of IR35 reform
“The OTS report [on the Small Business Tax Review] highlighted three options: suspend IR35, improve its administration or introduce business tests,” explains Whiting. “Suspension and seeing what happened next was the preferred option, but improved administration, and the creation of the IR35 Forum was the Ministers’ choice.”
According to Whiting, the objective of the options in the OTS report was simplification. “Simplification that, if you had 100 freelancers working through limited companies and, say 90 of them are genuine businesses and not in IR35, the solution would provide the 90 with certainty so they don’t have to worry about IR35.
“This would also mean that HMRC and professional advisers don’t waste time on unnecessary investigations. The 90 genuine contractors can forget IR35 and everyone focuses on the two or three or five in a hundred who should think about it.”
McVicker believes that certainty also means catching ‘disguised employees’ abusing limited company status as a tax avoidance mechanism: “It’s in the interests of genuine contractors that HMRC can identify those abusing the system, at a low cost to the taxpayer.”
Will HMRC’s new framework result in tax simplification?
“The jury is out for a while,” says Whiting on whether HMRC’s new framework will actually deliver tax simplification. “It will need monitoring and that means watching the tribunals. If we have frequent cases where contractors failed the business entity tests but are found outside of IR35, then it is not working. The acid test – it is going to cut out wasted effort?”
But Whiting believes that the tests represent a breakthrough, of sorts, as in its original scoping of IR35 simplifiction the OTS itself came up with ten business tests.
“The breakthrough is that you don’t have to have equal tests; you have weightings,” he says. “Of course, by including scoring you have more scope to ask ‘is it the right number’ and everyone will have an opinion. There is no absolute right answer and we have to try it in practice and see what turns out.”
HMRC’s ‘test and learn stage’ requires careful monitoring
“PCG plans to stay actively involved in the IR35 Forum and, in order to monitor HMRC’s performance, welcomes evidence from contractors about the new framework’s impact to feed into the Forum,” explains McVicker.
But he does not anticipate rapid changes to the business entity tests and guidance: “The next meeting of the Forum is planned for July and that meeting is likely to be dominated by the consultation on office holders and controlling persons being forced into Pay As You Earn (PAYE).”
Plus, McVicker points out that it will take time for cases of contractors believed by HMRC to be high risk and inside IR35 to work their way through the tax tribunals system. “We can only show how the business entity tests will compare to the findings of tax tribunals through practice, and that could take a year.”
Whiting argues that monitoring progress will result in process improvements: “In saying let’s try it, we’re not saying to HMRC simply get on with it. This needs to be a genuine trial with proper evaluation and a good debate about the results. We need to aim for something that works for all parties. Cut out the wasted effort.”
HMRC guidance measures unlikely to benefit contractors
McVicker highlights that the business entity tests are only one of the measures introduced as part of HMRC’s new framework, but calls into question their value to contractors: “Measures such as the new helpline are peripheral to the needs of genuine contractors outside of IR35.”
Vessey agrees: “HMRC’s new contract review service that will provide contractors found to be outside of IR35 with a certificate and reference number confirming their status for three years sounds good in principle, but realistically how many contractors will use HMRC’s service?
If we have frequent cases where contractors failed the business entity tests but are found outside of IR35, then it is not working
John Whiting, Office of Tax Simplification
“HMRC invariably require client confirmation of actual working arrangements and how many contractors will want HMRC contacting their client? And will helpline and contract review staff at HMRC really resist the temptation to inform their compliance colleagues when presented with evidence from a client that a contractor is inside of IR35?”
In its current form, it is difficult to see how HMRC’s new framework has improved the administration of IR35. As Whiting puts it, contractors are likely to look at the changes and ask, ‘Do they give me certainty?’. He says: “A contractor may self-assess as low risk but that does not stop HMRC asking questions. The crux is to leave 90% knowing they are in the clear, but will this [new framework] leave that 90% knowing they are in the clear?”
The answer, it seems, is ‘not yet’; but future changes may help develop the certainty needed by contractors, their advisers and HMRC itself.