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HMRC criticised for IR35 rules

What our clients say:


7th December 2021

HMRC’s evidence into the House of Lords Finance Bill sub-committee inquiry into off-payroll working has been criticised by self-declared IR35 experts.

Lord Bridges of Headley, chair of the sub-committee, asked the government to conduct a “wholesale reform of IR35”  in October.

The inquiry is a follow-up to the sub-committee’s report, Off-payroll working: treating people fairly released in April 2020. That report found that there were “inherent flaws” with the regulations.

What HMRC says

HMRC has released evidence which says it has provided information on the rules and workings of IR35 through webinars, workshops, letters social media and one-to-one calls.

It said it was “too soon” to evaluate the impact of the reform this April but will publish findings in 2022.

HMRC also said that according to its research in 2017, most organisations had no trouble filling vacancies after that year’s off-payroll reform. It added: “ Although a sizeable minority did see a change in their ability to fill vacancies in the short term”

The IR35 reform, which came into force in April 2021 moved the responsibility of deciding IR35 status from contractors to businesses. Many contractors say this has left them out of pocket and HR Review has previously reported that freelancers believe HR teams make blanket assessments when deciding off-payroll working.

Lord Bridges said: “Our previous inquiry found the government’s off-payroll working rules to be riddled with problems, unfairness, and unintended consequences.”

Contractor response to IR35

IR35 specialists Qdos have responded to HMRC. Its CEO, Seb Maley said the HMRC submission does tell the full story of the reform.

He said: “The government paints a picture that suits its own narrative and interests rather than addressing the realities faced by contractors and businesses.”

Mr Maley accused HMRC of making assumptions by expecting to raise £3.8 billion through the reform, saying it’s based on contractors being placed inside IR35, occasionally unfairly.

“And to say that IR35 reform has impacted only 180,000 contractors seems way off the mark, particularly when the government has previously said 500,000 people work through umbrella companies.”

CEST tool doesn’t work as it should

With regards to HMRC’s free CEST tool which assesses tax status, Seb Maley says HMRC wrongly claims it will stand by an IR35 decision based on CEST.

He said: “ HMRC still somehow claims that CEST is capable and aligned with case law. Again, it isn’t. The tool hasn’t been able to determine a contractor’s IR35 status well over 200,000 times in the past year or so.”

Qdos research shows contractors believe IR35 reform is the biggest threat to contracting next year.

This ties with what 48 percent of contractors told compliance firm IR35 Shield – that firms moved some of their projects offshore, which meant UK workers were left without work and therefore possibly not paying the amount of tax HMRC expected.

The firm’s survey of more than 3,700 contractors found

  • 88% of on-payroll contractors are now told it must be via umbrella.
  • But, only 6% of contractors say they are happy to use one.
  • 78% said they would be unable to detect a tax avoidance scheme.

Carry out proper assessments and hire the talent you need 

CEO of IR35 Shield Dave Chaplin said: “Our survey shows that firms shot themselves in the foot under the new Off-payroll rules.  They were ill-prepared and ill-informed by a government which was hell bent on its drive towards so-called tax fairness.”

He added that the pressure on businesses during the pandemic and mixed messaging fuelled the decision to issue blanket bans. This in turn led to commercial self-harm.

Mr Chaplin said: “The bans meant that many firms cut off their ability to hire the best talent, leading to cancelled and delayed projects. However, indications from our IR35 frontline shows that firms are now realising that the legislation is entirely manageable with a robust compliance process in place.”

He called on firms to carry out proper assessments to hire the talent they need.

Future HMRC plans

In its evidence letter, HMRC also outlined plans for one all-encompassing employments rights enforcement body. It says, while the current bodies are important and effective, it is fragmented and difficult to navigate.

by HR Strategy News

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