HMRC avoided recruiting any outside IR35 contractors in 2022

Qdos CEO, Seb Maley, offers his insight after it’s revealed that HMRC recruited no outside IR35 contractors between 2022 and 2023

In their annual reports, published on the 28th of July, HMRC let something slip. It was revealed that between 2022 and 2023 HMRC recruited no contractors outside the scope of the IR35 legislation. This is especially surprising considering that they employed 980 off-payroll workers.

What exactly does this mean? Let’s look at the numbers.

Here’s the information HMRC provided in their reports. As you can see, they engaged 980 off-payroll workers between 2022 and 2023. 927 of these workers were not subject to the off-payroll legislation, in other words, they were likely forced to use an umbrella company or other vehicle which meant they were subject to full employment taxes.

This left 53 of their workers subject to the off-payroll legislation. Of these 53, not a single one was determined to be outside IR35. Meaning that all 53 were determined to be employed for tax purposes and likely stuck in the “no man’s land” between employment and self-employment – with full employment tax yet no employment rights.

What does HMRC’s own guidance say on the matter?

HMRC state that a client ‘must take reasonable care when determining whether the worker would have been an employee if they were engaged directly’. With an example of behaviour not constituting reasonable care being ‘determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case’.

Given the above, many industry experts have labelled HMRC as hypocrites – particularly given HMRC’s own CEST tool only determines 24% of engagements as being inside IR35.

CEST is an online tool designed by HMRC to help businesses determine the employment status of their workers for tax purposes. The tool is free to use and involves a series of multiple-choice questions which can be filled out by anyone in the contractual chain including contractors, agencies, and end clients. The CEST tool has been a focus of much criticism over the years and has previously been branded as “not fit for purpose” by the House of Lords.

Something has to change.

HMRC have historically been prolific – and successful – proponents of the use of contractors, who have played a key part in the continued development of the department’s digital evolution. In the years following the reforms to IR35, it has become very clear that taking a risk averse stance when it comes to determining status puts organisations at a distinct commercial disadvantage.

Put simply, businesses and organisations who have a compliant yet pragmatic approach to the off-payroll rules will attract the best talent. Contractors, who are acutely aware of how IR35 should be handled, will naturally gravitate to roles falling outside the rules and will eschew opportunities which force them into PAYE arrangements.

HMRC’s recent customer survey shows significant decreases in positive ratings amongst small businesses – particularly around HMRC’s online systems. Could this be because HMRC have scuppered their own ability to attract and engage flexible talent?