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IR35 Forum Minutes emphasise that HMRC are missing the point

HMRC Publish the Latest IR35 Forum Minutes 

Earlier this week, the minutes from the IR35 Forum on July 17th were published. The summary offers valuable insight into HMRC’s reaction to the scrutiny they faced over the implementation of recent public sector reform, and suggests that private sector reform – albeit not confirmed – might well be on HMRC’s agenda further down the line.

In addition, the IR35 Forum Minutes also reflect a sincere lack of understanding from HMRC, when probed by industry professionals on the issue of IR35 and the true impact it’s having on contracting, recruitment and the workforce.

No clear answer on private sector reform.

Perhaps most notably, HMRC failed to give a clear answer when questioned on whether they plan to extend the new off-payroll working rules to the private sector. The notes explained:

“Members asked if the recent reforms in the public sector would be extended to the private sector. HMRC explained that the current focus is on embedding the recent reform, and that it was not possible to comment on the plans of the new administration. However, we do of course want to see compliance improve in the private sector."

Given the chaos and confusion surrounding recent public sector reform, HMRC is right to focus on the ongoing implementation. That said, a ‘no comment’ (or words to that effect) and a subtle hint that they are looking to stamp-out tax avoidance in the private sector also, is not enough to quash ongoing rumours of wider reform. In effect by not entirely ruling private sector changes out, HMRC have opened the door to further questions and greater uncertainty.

If private sector reform is on HMRC’s radar, they have a responsibility to give contractors and recruitment agencies as much time as possible to prepare. Ambiguity isn’t helpful. Nobody wants a situation similar to the one experienced when public sector changes were enforced in April of this year. Put simply, it’s vital the same mistake is not made twice.

A tool which remains in beta.

The IR35 Forum notes also highlight that the CEST Tool (Check Employment Status for Tax), previously named the ESS Tool, still remains in public beta. This in itself is a concern.

“The service is still in public beta, but will be going live shortly. No further changes to CEST are envisaged at this time, but if customer feedback indicates the need to change parts of CEST, HMRC will do so.”

The tool is used by clients and agencies to determine whether public sector contractors belong inside or outside IR35. That a number of months down the line – and by HMRC’s own admission – the tool is still in test mode, will not offer much peace of mind to the thousands of contractors whose IR35 status rests on its decision.

Since its release, the tool has been criticised for its lack of accuracy, and that the determination relies heavily on ‘substitution’. If, as a contractor you don’t have the right to send a replacement, there’s little chance that the tool will class you outside IR35, regardless of whether you have control over how your work is carried out.

 

A tool which has been used 450,000 times.

The forum notes go on to reveal that the CEST Tool has been used some 450,000 times, and reaches a determination 85% of the time. For the 15% of cases which the tool cannot determine, HMRC offers further guidance and its IR35 helpline to solve more complex cases.

The concern is not simply over how many times the beta tool has been used, but the accuracy of the 85% of determinations it provides. IR35 legislation is complex, easily misunderstood and in many cases, misinterpreted. It’s essential therefore that each case is dealt with by a tax expert with an in-depth understanding of IR35. Leaving such important decisions to an untrusted piece of technology will always be a risk.

It would have been useful for HMRC to disclose how many of these contractors are now working inside IR35 in the public sector, if anything to see whether they’re on course to achieve what they set out to – and recoup the rumoured £400m in missing tax.

 

HMRC unaware of significant rate changes.

“HMRC was not aware of any significant movement in contractor rates, but this is a contractual matter.”

Raising day-rates is viewed as a possible way to combat the added cost of working inside IR35. Regardless that HMRC suggest they have not noticed a change in contractor day-rates, Qdos Contractor is set to carry out its own research to get a better understanding of the true impact of public sector IR35 reform. We aim to publish this information in the next fortnight. Click here to tell us if you have changed your day rate due to the IR35 reforms.

 

No evidence of public sector exodus.

HMRC claim they have “seen no evidence of significant impact on attrition rates of contractors working in the public sector.”

Soon after public sector reform was enforced, Qdos research highlighted that 49% of contractors placed inside IR35 were planning to stop working on their public sector contracts. 61% of those indicated they were planning to leave their roles within 1 to 3 months, or 3 months or more. While the public sector exodus might not have been as drastic as first feared – in many cases thanks to the rise of detailed IR35 assessments – to suggest there has been ‘no significant impact on attrition rates’ is a bold claim.

 

Public sector policing.

“HMRC will be undertaking compliance activity with public bodies; focusing on the implementation of the reforms, checking compliance of the reforms and the correct treatment of workers under the off-payroll rules.”

As revealed previously, HMRC are gearing up for public sector compliance checks. While these checks are widely expected to be informal initial enquiries, it simply highlights the need for public sector companies and agencies to carry out thorough, well-informed IR35 assessments.

By:Benedict Smith

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