HMRCSR0023
Written evidence submitted by Dave Chaplin
Re: Further fixes required to the IR35 Off-payroll Reforms
Firstly, may I thank the Committee for its interventions on the issue of tax offsets concerning the Off-payroll Working legislation (Chapter 10, ITEPA 2003), about which I previously submitted a one-pager to you in early February 2022. The fundamental flaw was admitted to PAC when explored with HMRC's Jim Harra on 21 February 2022 (See Q17), who described the anomaly as an "incentive." Sensibly, the Government have signalled an imminent statutory resolution to be made in the next Finance Bill (See Autumn Statement 2023 - Page 91, point 5.50), with legislation retroactive from April 2017.
The offsets fix will undoubtedly help resolve disputes between hiring firms and HMRC by smoothing the way for fair settlements where errors have been found, avoiding the need for parties to unnecessarily exercise their rights to an equitable outcome via tax tribunals.
Two other flaws: Two fundamental flaws remain in the legislation, which result in unjust outcomes. The first is the lack of an appeal process. The second concerns recruitment agencies.
Both issues distort and damage the freelance market and undermine what should be a vibrant freelance sector.
1. Lack of appeals: Issuing an assessment in a Status Determination Statement (SDS) is not mandatory, making it impossible for workers to exercise Section 61T. Also, any appeal via Self-Assessment is pointless because it takes years and does not claw back the employer's NI that has been deducted further up the chain. Also, because HMRC will not arbitrate between firms and workers, there is no access to natural justice.
2. Unfair Recruitment anomaly: Where a firm completes an SDS with reasonable care (easy to do) which states "Outside IR35", and gives it to a worker via an agency, if HMRC intervenes, the agency gets the tax bill, even though they were not the decision maker. That's a fundamental error in how taxes usually operate.
APPENDIX 1: PAC Recommendations from Dec 2022 – My commentary
PAC published a report on 11 May 2023 titled "Lessons from implementing IR35 reforms", which contained recommendations.
Here are my comments – from the front line of IR35 / OPW on some of those.
1: PAC recommendation: HMRC should develop robust estimates of non- compliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools. It should adopt a similar approach for the private sector as the reforms bed in and write to us with an update in six months' time.
Me: We are not aware of any further research that has been published. Much of the private sector acted like the public sector and banned contractors operated by limited companies. One problem was that HMRC appears to have misled firms on their view of the potency of the "control" factor when making determinations. As we saw in the Kaye Adams case, control was significant, but she was still self-employed.
2: PAC recommendation: HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. As part of this, it should assess the extent to which workers are using existing appeals routes, and how well they are working.
Me: This is where the main problem sits.
5: PAC recommendation: In light of actual experience, HMRC should produce and present to Parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain.
Me: Firms spend up to £150 per assessment on an ongoing basis but are also hiring advisors, who are circa £400 per hour. Enquiries by HMRC for large firms that have hundreds of contractors will cost around £500,000 in fees before even reaching the tax tribunal. The burden is enormous.
On top of the direct cost, many contractors refuse to work for large firms that ban them instead of working for overseas firms.
Any suggestion that the IR35 reforms have picked out only the deemed employees is laughable. The market is heavily distorted. The health sector has enormous issues.
APPENDIX 2: Lack of appeals
There are theoretically two routes to appeal, but both are fantasy and detached from the reality of how the market has responded.
1. Appeal to the client, based on Section 61T – saying the assessment is disagreed with, and the client has to reconsider.
2. Appeal via the self-assessment tax system.
[1] does not happen because there is no mandatory requirement for a firm to give a Status Determination Statement (SDS) to a worker. Without the "giving", Section 61T is inaccessible.
[1] does not happen because when firms decide they do not want to take the risk, no assessment is done, and the work is offered based on the condition that the worker must be on a payroll – which can often be an unregulated umbrella.
[1] does not work because even if the worker disagrees, the client considers and comes up with the same answer. The worker cannot ask HMRC to arbitrate.
Notably, there would be a route to appeal in the original consultation, which Ministers were told about. That was taken out, and the policing job was given to the person who assessed in the first place. Firms mark their own homework. Can you see the issue?
[2] It does not work because it's impractical, and IR35 enquiries by HMRC take years. You may be aware Kaye Adams's case took nine years and cost her more than the tax at stake to disagree. The practical obstruction means the route does not work.
[2] Even if HMRC could assess quickly, it's irrelevant because the entire issue IR35 seeks to address is the Employer's National Insurance. That is a payment made by the client, not the worker. Firms are reducing rates to cater to this. Any appeal by the worker does not mean they can get their hands on the employer's NI. Any appeal won would be favourable to the client, not the worker.
The stark reality is that no natural justice exists, and access to justice has, by design, been obstructed.
APPENDIX 3: Fundamental flaw for recruiters
Consider the situation where a recruitment agency is within the supply chain, and a contractor, operating via their limited company business, provides services to one of the recruiters' customers – a "client", as Off-payroll refers to them.
Suppose the "client" makes the IR35 status decision of "Outside IR35" (rules don't apply), but this is later found to be wrong by HMRC, despite reasonable care being taken by the hiring firm. The recruiter, who had no cogency over the decision, passed to them in a valid Status
Determination Statement and paid the contractor's company gross – yet they end up with a tax bill, not the client.
That's not right and breaches a fundamental tenant of the tax system – the decision maker should end up with the bill rather than being cast off to an unwitting victim.
HMRC confirmed this perverse consequence is true to the stakeholders on the IR35 Forum (now called the Employment Status and Intermediaries (ESI) Forum) on 08 December 2022, as per their meeting minutes:
"Members raised a technical question on the application of the OPW rules. They asked that where reasonable care has been taken and the worker receives an 'outside' determination that HMRC subsequently determines to be incorrect, with whom does the liability sit? HMRC explained the if the client takes reasonable care and ultimately gets it wrong, then liability will sit with Deemed Employer, who is usually the organisation sitting at the lowest point in the chain." [Emphasis added.]
That does not make sense.
HMRC's guidelines, in ESM10014, also confirm this is the case:
"If a client is not already the deemed employer, and has taken reasonable care and fulfilled its other duties (such as issuing the SDS), the responsibility for deducting tax and NICs and paying these to HMRC will not rest with it. This is the case even if it turns out that the client got the decision wrong."
It's perplexing why HMRC appear to be comfortable with this position.
How to fix this in a single-line legislative amendment
What would make sense is that the tax risk only passes to the agency if the Status Determination Statement states, "Inside IR35.
A simple one-line fix to the statute in Section 61N(5) is needed to achieve the simple mechanic. 61N(5) contains the mechanism that triggers the passing of tax risk down the supply chain based on the Status Determination Statement (SDS) being "given."
Instead of this in 61N(5):
"Unless and until the client gives a status determination statement to the worker (see section 61NA), subsections (3) and (4) have effect as if for any reference to the fee-payer there were substituted a reference to the client; but this is subject to sections 61V and 61WA."
Change it to this (underline added):
"Unless and until the client gives a status determination statement to the worker (see section 61NA), which states that the client has concluded that the condition in section 61M(1)(d) is met in the case of the engagement and explains the reasons for that conclusion, subsections (3) and (4) have effect as if for any reference to the fee-payer there were substituted a reference to the client; but this is subject to sections 61V and 61WA."
The effect of this simple amendment is five-fold:
1. Firms with a less-than-robust assessment regime can no longer rely on an agency picking up their tax bill simply because they pass an SDS to the worker.
2. Recruiters would be protected and could stop worrying about tax laws they did not understand.
3. It would eliminate contentious litigation between firms, arguing over the esoteric topic of whether they did or did not meet reasonable care.
4. It would eliminate the likely appeals to tax tribunals over reasonable care between HMRC and the parties in the supply chain.
5. It would make settlements smoother and quicker.
My credentials on the topic of IR35:
- Author on books on IR35 (See Amazon) - Studied the status case law for 20 years.
- Hundreds of FOIs on the matter
- Debunked accuracy of CEST, proved no data exists for accuracy.
- Provided evidence to NAO, as part of the enquiry into the BBC fiasco
- Provided evidence to NAO, as part of IR35 enquiries
- Help defend taxpayers on IR35 matters at tax tribunal
- Consulted with HMRC/HMT, and the ex-Office of Tax Simplification.
- Provide advice and guidance to hundreds of firms on IR35 matters.
- Led the Stop The Off-Payroll Tax Campaign (https://stoptheoffpayrolltax.co.uk/), which led to the IR35 Review.
- Founder of ContractorCalculator.co.uk – over 100,000 visitors per month. - Founder of IR35 Shield – helps firms / contractors do IR35 assessments.
Declaration of interest
I’ve been in this market for 23 years, first being a contractor myself. My background is mathematics, computer programming, and algorithm design. 10 years ago we built an online status test to try and help people ascertain their IR35 status. Today it’s wrapped up in something called “IR35 Shield” which is a commercial operation. My website ContractorCalculator.co.uk is also commercial, and has been running for over 20 years. It’s in my interests for contractors to be given fair tax treatment.
Whilst I accept to underlying premise / motivation of IR35, to stop false self-employment and tax avoidance, the overriding objective needs to be achieved in a fair manner.
December 2023