IR35 consultation: everything you need to know

We had hoped the government might see sense and scrap plans to tighten IR35 in the private sector, but we never believed it. Unfortunately, we were right to remain cynical. Earlier today HMRC published its consultation on ‘Off-payroll working in the private sector’. Here’s what you need to know.

The document starts off by asserting there is wide spread non-compliance with IR35 and which will cost the government £1.2bn annually by 2022/23. Where does this figure come from? No one knows. Yet it’s used repeatedly throughout the document to justify the government’s intention to act.

It claims that genuinely self-employed people will continue to be treated as self-employed for tax purposes. Try telling that to thousands of genuinely self-employed professionals in the public sector who have been wrongly forced onto the payroll of an umbrella organisation against their will.

The document even claims last year’s public-sector reform has resulted in clients and agencies paying employers National Insurance. In fact, in most cases, this liability has passed down to the contractor, along with a requirement to pay the apprenticeship levy.

This precedes a much longer defence of the public reforms which can best be summarised as ‘it was tremendously successful, because it resulted in people paying more tax’. No consideration is given as to whether those engagements were correctly assessed, just that it netted an extra £410million for the exchequer. The ends, apparently, justify the means.

There is even a staunch defence of the government’s Check Employment Status for Tax (CEST) tool, completely ignoring criticisms such as those made by Mark Taylor of Chartergate Legal, not to mention the Director General of the BBC, who said that CEST wasn’t fit for purpose.

Menacingly, there is a note halfway through the document which complains of the onerous requirement to consider engagements individually, which is seen to be ‘clearly very inefficient’. This point really cuts to the heart of what the government are trying to do here - they want everyone to pay tax via the RTI system.

Chasing up individual tax returns means more work for the Revenue, and it means they get money up to 20 months after the income has been received. It’s much easier get business to collect the tax for them, and hand it over to the public purse in real time.

It’s not until page 21 that the document cuts to the chase and talks about what the government is proposing to do.

It sets out the following options:

Option 1 - extending the public-sector reform to the private sector

Stated as the preferred option by government, this would shift the burden for determining status over to the client. If IR35 is deemed to apply, payments would be channelled via RTI payroll software - just like they are for employees. However, in this case the contractor gets none of the employment rights. Frankly the idea that a client will look at the working practices of an engagement, decide that it looks like employment, but then not be required to employ them, is a scandalous position for the government to take. It makes a mockery of all the noise over Matthew Taylor and the ‘good work’ review.

Option 2 - encouraging or requiring businesses to secure their supply chains

This may turn out to be the lesser of a few evils, or not, depending on what it would actually involve. The idea is to place an IR35 compliance checking burden on the client. It will no doubt involve lots of unwelcome intrusions into contractor businesses. Whether that’s preferable to clients unilaterally deciding that IR35 applies will need to be considered. As is always the case in these matters, the devil will be in the detail.

Option 3 - additional record keeping

This option would place an obligation on clients to retain records about all their off-payroll engagements. The records would include working practices, shift rotas, contracts – basically the type of information HMRC would ask for were it launching an IR35 investigation. With the information more readily to hand, HMRC could more efficiently enforce the current IR35 rules. Despite putting this option forward, HMRC doesn’t seem overly supportive of it – “there are some clear and significant downsides” – so it’s fair to say it’s not a front runner.

Option 4 - others

Generously, HMRC invite respondees to put forward their own suggestions on how they could best tackle non-compliance with IR35. This is normally where IPSE would put forward the Freelance Limited Company (FLC), but HMRC has pre-empted us and dismissed the idea out-of-hand.

The Freelancer Limited Company (FLC)

This part of the consultation document seems to be directed squarely at IPSE. We spent considerable time working up, and testing with our membership, a credible alternative to IR35. The FLC is a new concept that would protect revenue for the exchequer while at the same allowing contractors to operate free from the stress and worry of IR35. We developed it with EY and it was given an honourable mention in the Office of Tax Simplification’s Small Company Taxation Review.

Unfortunately, HMRC doesn’t seem to be enamoured by the concept. They say the FLC is “out of scope as it would effectively create a new tax regime, rather than improving compliance with the current rules”, adding further proof if it were needed that government are incapable of thinking outside of the box by considering options that don't revolve around IR35.

Minimum length of engagement, clients paying employers NICs and a flat-rate scheme

Apart from the FLC there are one or two other ideas which HMRC don’t consider worthy of serious consideration. The length of engagement suggestion, whereby IR35 can never apply to engagements that last for fewer than ‘x’ months, is given short shrift. IPSE was never keen on this idea anyway as it would effectively place an artificial time limit on perfectly compliant arrangements. They also dismiss an employers’ NI liability for clients and a version of the construction industry scheme - a type of withholding arrangement.

So, it looks like there are three options on the table - extension of the public-sector rules; requiring businesses to secure labour supply chains; and additional record keeping. Of these, government is clearly eyeing the first as its preferred route.

IPSE’s view is this will be disastrous for contractors, their clients and the economy as a whole. We will leave the government in no doubt that this is an anti-business measure, from a political party that is supposed to support business. IPSE will throw everything it has into this fight. The stakes are huge and it’s up to us to make sure the government sees sense.

Meet the author

Andy Chamberlain

Deputy Director of Policy and External Affairs