The minutes from February’s IR35 forum, in which HMRC met with industry experts to discuss - in the large part - the introduction of IR35 reform in the private sector, have now been published.
This meeting was held a few weeks before the arrival of the long-awaited IR35 consultation (which was opened on 5th March) and focused on a number of key areas relating to the off-payroll working rules, including Mutuality of Obligation (MoO) and CEST (HMRC’s IR35 tool). The growing concern among members regarding non-compliant intermediaries, that often advertise their service as a bullet-proof IR35 solution, was also a topic of discussion.
In the meeting, HMRC asked the IR35 experts involved to contribute to clarifying Mutuality of Obligation (MoO) - perceived to be an important factor to consider when determining IR35 status.
Members were handed a paper, which focuses on the Jensal case (that Qdos won on behalf of its client) and a number of other IR35 cases in which MoO played an important role. HMRC has asked them to provide feedback by 7th June 2019, as the taxman looks to make this aspect of the IR35 legislation better understood:
“HMRC agreed there are difficulties raised by some interpretations of mutuality of obligation in Tribunal cases. HMRC sees this as a result of how mutuality is looked at through different lenses by Employment Tribunals when they are looking at continuity of employment. However, in the tax context, HMRC are prepared to litigate appropriate cases where necessary.”
Importantly, HMRC also promised to explore ways MoO could be introduced to CEST. Currently, the IR35 tool assumes that it exists in every contract - a view that many IR35 experts strongly disagree with.
Concerns about the reliability of HMRC’s much-criticised IR35 tool, CEST, seem to be raised in every forum meeting. And for good reason. Still, more than two years after its introduction prior to public sector reform, big questions remain over the accuracy of the technology.
While this is a problem HMRC has - in the past - been reluctant to admit and address, the fact that the taxman has now encouraged members of the IR35 forum to take part in refining the tool could be seen as a positive development:
“HMRC are continuing to work with stakeholders to enhance CEST and encouraged members to respond to the invitation to take part in those discussions and user tests.”
HMRC also said that it’s aware of the need to upgrade CEST as soon as possible, but in the meantime will stand by answers provided by CEST in its current state. A timeline wasn’t given for the promised improvements.
Qdos is one of several specialists that have issued warnings to contractors regarding too-good-to-be-true IR35 solutions available on the market. This is a point that HMRC said it is aware of and is “responding to that risk.”
The minutes went on to explain that the taxman is “looking at different and innovative ways to raise awareness (of these intermediaries) and agreed that this needs to start soon, as new models will start to appear before the implementation of the off-payroll reform in 2020.”
Forum members told HMRC that many of the large private sector businesses, that will be responsible for administering the IR35 rules from April 2020, are still - even at this stage - unaware of incoming changes.
This led them to question HMRC whether the guidance and support that was promised have been given to the private sector. In response, HMRC said that once the IR35 consultation has been published, it could “increase the education and engagement.” HMRC officials also “reassured forum members that they are considering innovative ways to raise awareness.”
While a specific date (or month) has not been given, the minutes confirmed that the draft legislation for the proposed changes will be published this coming summer.
HMRC is under pressure to release what will likely be the final details (barring any tweaks) of further IR35 reform sooner rather than later. Experts say that the earlier medium and large private sector businesses have the correct information presented to them, the better the chance of successful implementation.
Members raised the issue of the difference between HMRC’s estimate of IR35 non-compliance (which the taxman said will amount to £1.3bn in 2023/24) and its predicted additional revenue in the same year (expected to amount to £725m in the same year).
Given the two sums are vastly different, critics of IR35 reform have questioned the accuracy of the estimates. HMRC, however, batted this away, stating: “There is normally a difference between the estimate of Exchequer cost of non-compliance and the estimated yield from measures to address it because of a range of factors including behavioural impacts and the design and scope of a measure.”
While HMRC certainly showed signs that it’s willing to listen to constructive criticism and valid concerns regarding the evolution of IR35, only time will tell as to whether the taxman plans to work with sector experts to improve the legislation going forward.
You can read February’s IR35 forum minutes on the Government website, here.
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