Contracting expert urges HMRC to repeal IR35 reforms before it is too late

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With experts expecting Government to roll out the IR35 reforms into the private sector, Dave Chaplin, CEO and founder of ContractorCalculator, urges HMRC to face up to the mounting body of evidence that has been building against the reforms since they came into effect, repeal the reforms and then think again.  Here, Dave explains why HMRC should honourably fall on its sword before any more destructive decisions are taken.

The fundamentals are flawed

Taxing people as employees without granting them employment rights is wrong. HMRC also clearly does not understand IR35, often stating they believe that two people performing the same type of work should be taxed the same.  There is no basis in law for such a claim and it is not what IR35 set out to achieve in 1999.

HMRC overlooks the fact that contractors command higher fees and therefore generate more tax for the Treasury than their permanent counterparts. So, forcing contractors into employment is, in reality, a tax-reducing measure.  The new rules are also threatening the livelihoods of some agencies as they have to bear the tax liability risks despite having no influence over employment status decisions. 

Chaos has ensued

Many public-sector organisations simply do not have the knowledge and resources to steer the IR35 course steadily and apply the rules correctly.  Many contractors are being misclassified and the fallout is false employment and a potential increase in the number of employment tribunals. 

The new reforms have been poorly implemented by HMRC including poor communication with clients and agencies. The last-minute introduction of a hastily built employment status tool (CEST) has been proved unfit for purpose, creating more confusion and judicial review action. 

HMRC is in no position to claim success and use it as leverage to roll out the reforms into the private sector - the impact on the UK economy would be disastrous.  Over the past few months we have seen a raft of legal challenges being taken up as many clients take sweeping decisions to impose unlawful blanket rules in order to dodge compliance requirements.  The damage has been done and research is now proving that.  A survey of more than 1,500 contractors we conducted via ContractorCalculator concluded that three quarters of public sector departments lost valuable contractors following the changes, leading to delays and cancellations of critical projects costing millions of pounds – which Transport for London recently confirmed.

The survey revealed the following impacts:

-          76 per cent of public sector departments lost highly skilled contractors
-          71 per cent of projects were delayed or cancelled
-          27 per cent of public sector contractors left after the reforms went live
-          38 per cent of contractors couldn’t be replaced
-          24 per cent of projects lost at least half of their contractor workforce

And APSCo’s survey findings aligned with our own, finding that:

-          70 per cent of recruiters say contract placements in the public sector have dropped
-          45 per cent report charge rates for contractors working in the public sector are increasing
-          78 per cent believe extending rules to the private sector will impact the UK economy’s ability to source flexible labour

Unfortunately, rather than acknowledgment from HMRC they question the data from two independent surveys, and simply claim it is not true, without substantiating their counter claims with empirical evidence.

HMRC’s CEST unfit for purpose

ContractorCalculator tested CEST against the 21 historic IR35 tribunal cases earlier this year and proved beyond doubt that HMRC’s tool is simply not fit for purpose.  For 27 per cent of the court cases, HMRC simply concludes “Unknown”.

Further testing of common scenarios also revealed some surprising results; contractors who are significantly controlled, or moved about from task to task without it being written into their contract, can pass the test, contrary to what the case law says.  There is no case law to support this.  “Tail-end Charlies” should be classic fails.  Similarly, a significant number of project based contractors who should easily pass the test are being given the status “unknown”.  What’s more, since April 2017 we have learned from research we conducted that only 10 per cent of contractors are now using the CEST tool and agencies and clients have also turned their backs on it. 

HMRC continues to bury its head in the sand, claims its tool is accurate despite overwhelming evidence otherwise, and claims it will stand by the result – for which it has no legislative powers to do so, and it comes with caveats that make the claim meaningless.

HMRC is a law unto itself

HMRC is attempting to overwrite existing employment status and tax laws with its CEST tool which has no basis in law.  They are acting ‘ultra vires’ and the taxman has appointed itself to act as judge, jury and executioner. It has even dismissed other means of IR35 assessment as “not helpful” – despite other firms offering assessments for over 15 years. It has even threatened contractors who do not use its tool with penalties. 

HMRC also manipulated the minutes from a recent IR35 Forum meeting omitting any criticism of the reforms that were discussed during the meeting voiced by contracting stakeholders.  HMRC is also spreading propaganda to cover its failings – when evidence was presented showing that its tool doesn’t match court case results HMRC claimed no-one could possibly understand the cases in detail, despite almost 500 hundred pages of the judge’s decisions having been in the public domain for a decade.  HMRC also insists that contractors haven’t left the public sector despite many sources proving the opposite.  Some have also reported that rates have been increased in order to hold onto contractors.  Again, HMRC denies that this has happened on the ground.

The upshot is that the flexible market has taken a hit and is suffering because the public-sector reforms have compromised the flexibility that the UK labour market relies on.  Companies who are able to hire contractors will have to pay much more to do so and HMRC’s increased tax take will be to the severe detriment of the UK economy as a whole. 

Given the chaos that the changes to IR35 have caused in the public sector, HMRC cannot possibly expect to garner support for a private sector rollout. The only way that the taxman can resolve the imbalance in hiring costs between these sectors without risking serious damage to UK Plc is by repealing the reforms altogether.  Let’s hope HMRC comes to its senses before it is too late.  We can but hope.

Dave Chaplin, CEO and founder, ContractorCalculator
Image source: Shutterstock/MaximP