HMRC'S second IR35 consultation: what to expect

HMRC's Second Consultation Document on IR35 reform to be published in the lead up to Summer 2019 focusing on the detailed operation of the new rules

It was announced in the ‘Summary of Responses’ document concerning IR35 reform in the private sector that a further consultation will take place in the coming months;

“A further consultation on the detailed operation of the new rules will be published in the coming months. This consultation will inform the draft Finance Bill legislation, which is expected to be published in Summer 2019.”

HMRC’s Check Employment Status for Tax tool (CEST), has been heavily criticised for a number of reasons including;

• Failure to provide a determination in some cases
• Key IR35 case law missing – Mutuality of Obligation (MOO)
• Failure to take into account workers undertaking multiple contracts
• Responses entered can be contrived to achieve a pass result
• There is no ability to expand on any information
• Some of the questions are not appropriate for all workers in all industries

When IR35 reform was introduced into the public sector in April 2017, the CEST tool was unfinished, which led to a lot of uncertainty and confusion, so at least it seems that HMRC have learnt from their mistakes in this respect by looking to improve it before the next piece of reform descends upon us.

In addition to improving CEST, “The Government intends to further explore options for the consequences of businesses failing to use reasonable care in making their decisions.” In the public sector, many organisations made blanket determinations, forcing many contractors to work inside of IR35 even though they may have been genuinely self-employed. 

The Government will also address concerns regarding the fact that MOO is excluded from CEST. Although HMRC have previously made some attempt to allay concerns by publishing a paper on MOO, it did little to resolve the issue, only serving to highlight HMRC’s lack of understanding on such a crucial factor. MOO is prevalent in many IR35 cases and in recent tribunal cases is recognised as an important indication of employment status. HMRC’s lack of success in defending tribunal cases of late may well have put further pressure on them to address this issue.

Additionally, HMRC will issue further guidance,

“The guidance will aim to support businesses to make employment status decisions with confidence, which people working through personal service companies will be able to see and understand. HMRC will also set out what people should do when they do not agree with the business decision on their employment status.”

Some quite ambitious statements you might think, particularly in helping to make employment decisions with confidence, and HMRC made similar promises when reform of IR35 was introduced within the public sector; in reality, there was the opposite effect.

The Government and HMRC at least seem to have one ear open, which along with delay of reform until 2020 is perhaps the best we could hope for. We await the further consultation document for HMRC’s promised improvements but if experience tells us anything it should be that we shouldn’t expect too much…