Why private sector IR35 reform isn't inevitable
Two pointers in an otherwise largely acceptable viewpoint piece on FreelanceUK yesterday stuck in my craw, writes ex-tax inspector Carolyn Walsh, managing director of Andraste Accounting and CWC Solutions.
The first of the two pointers is rhetorical: “Given that HMRC most likely consider public sector reform a success so far, why wouldn't they roll the same changes out to the private sector?”
A seemingly harmless question, perhaps.
The second issue I take issue with is: “Having two significantly different versions of the same legislation for what is essentially one group of taxpayers is not viable in the long term.
“It makes an already complex piece of legislation even more complicated, and naturally makes the private sector a far more appealing prospect for freelancers and contractors; something which government departments became acutely aware of during the implementation of public sector reform earlier this year.”
On the contrary, it seems to me that HMRC has made the job of monitoring and implementing IR35 compliance a whole lot easier; for the department, if not for freelance companies.
Where freelance contractors have fallen victim to a blanket determination that they are operating inside IR35 and have pleaded for assistance from HMRC in the form of a contract review, a standard letter is being sent to those taxpayers.
A couple of extracts from the letter, which I’ve shared with FreelanceUK, inform the reader of the latest approach of HMRC: “From 6th April 2017 if you are engaged by a public sector body they will take the decision on whether or not IR35 rules apply.” That’s what we knew -- of course, but then the interesting part: “HMRC no longer offer contract reviews where the Engager is a public sector body.”
My opinion is that rather than over complicating matters or having increased the workload, the public sector IR35 reform has slashed the number of potential interventions that HMRC will now need to carry out. Personally, I believe that was the main aim of the public sector reform, and in that respect, it could not really fail.
At the time of writing, I would say that HMRC is ambivalent about the impact of the reform rather than seeing it as a “success”. Those freelance contractors and consultants who should be operating IR35 are probably now employed by an umbrella company, while those who operate outside IR35 but who are suffering a deduction under the deemed payment procedure of the new legislation, are advised in the HMRC letter: “If your IR35 status isn't resolved then you can claim an overpayment when submitting your Self-Assessment tax return.”
The taxman appears to have adopted a laissez-faire attitude with IR35 and the public sector, leaving more resources to help those in the private sector to ‘get it right’ when it comes to IR35 status. In the private sector, the responsibility for the decision on IR35 lies with the freelance company and, also cleared stated in the letter, HMRC advises that the use of the ESS tool (the IR35 digital tool) will provide “sufficient evidence” to make that decision. The department goes on to say that its IR35 unit will assist with contract reviews only where the freelance company is unable to reach a decision.
To me, this doesn't sound like HMRC is about to change the IR35 legislation, it sounds more like it is waiting for the legislation to bed in.
Obviously, there will be an element of HMRC looking to grab more tax, but while the experts focus solely on that issue, HMRC continues to devise systems which just make their job easier.
We know that revenue is the name of the game, but ‘cost’ to the department weighed against ‘benefit’ is always the deciding factor. So will the public sector reform be extended? I think not; IR35 legislation is complex and the private sector is too wide and diverse for HMRC to be able to tackle with just a reform of the existing IR35 legislation.
The only thing which is certain is what we can see, and that is HMRC leaving the public sector and its freelance contractors completely to their own devices, and to a large extent every other contractor too -- at least those who can prove they operate outside IR35 using the ESS tool.
5th September 2017