HMRC accused of not understanding its own IR35 tax reforms ahead of private sector rollout MPs have warned the UK government to pay close attention to the effect IR35 tax reforms will have on the private sector, and questioned the efficacy of HMRC's status-checking tool. Amid much controversy, the government rolled out changes to IR35 – or off-payroll working – rules in the public sector in 2017, and plans to do the …
This is exactly what I was going to point out. "It shifts responsibility of determining tax status from the contractor to the client" would be more appropriate, although that could be accused of being biased in the opposite direction.
The biggest flaw in all of this is that if a role is "inside IR35", they should be taking on an employee. The employer/client is the one using a loop-hole to get out of their responsibilities on tax and employment rights, not the contractor/employee.
"The biggest flaw in all of this is that if a role is "inside IR35", they should be taking on an employee. The employer/client is the one using a loop-hole to get out of their responsibilities on tax and employment rights, not the contractor/employee."
That is entirely accurate - in that situation a Fixed term employment contract could be offered instead of a "normal" contract role. The only difference in that case would be which entity pays the tax (no one is better or worse off).
I was deemed inside IR35 even though I was paying myself via PAYE from my Limited Company and that payment included BOTH Employee and Employers N.I. I also had my own company pension scheme that the company contributed to as well as myself.
I decided enough was enough and went to work in Qatar for nearly five years (4 tax years). When I returned I closed the company and went permie. It wasn't worth fighting HMRC who were never able to answer the questions about double taxation.
They could not organise a pissup in a brewery unless they were 1,000,000% sure that the chosen brewery was paying every penny in duty, income tax, N.I. VAT, corporation Tax and anything else you can think of first.
>The difference is that with an employment contract the employer would have to pay thier fair share of National Insurance etc, plus holiday pay.
But on the other hand, won't incur a VAT charge on the transaction. [NB. As with all things to do with VAT, depending on the client organisation, the VAT status of the project etc. this may or may not be a benefit - if in doubt speak to an Accountant...]
Exactly. And the idiots in government and/or HMRC don't understand the people contracting do it because they can make more money. However, they have the big disadvantage of not knowing where the next pay cheque will come from, not knowing if they'll be employed for months, not getting sick pay, not having pension contributions made and all number of things.
I now see companies just hiring "contractors" to abuse this. So they can get rid of them with only a weeks notice and not give them any benefits.
The MPs didn't mind themselves abusing expenses though. Only saying "It was wrong" once they'd be caught.
"She said "it appears that HMRC does not understand the IR35 rules", noting it had lost about half its cases, including one against Lorraine Kelly last month."
Yes, except...
Lorraine Kelly won an appeal because the judge reckoned she wasn't playing herself but some carefully crafted fake version of herself on TV. However, she has recently won an award, the citation of which read that she was relatable on TV precisely because she was herself, and was not a carefully crafted fake version. So on balance, I'd say that HMRC was right in this particular case, and the judge got it wrong.
Of course, saying that someone doesn't understand their rules because they lose appeals is nonsense unless you also know how many cases are appealed. Consider two scenarios:
HMRC makes 1000 decisions, two are appealed, one is overturned: HMRC is excellent at judging cases.
HMRC makes 1000 decisions, 1000 are appealed, 500 are overturned: HMRC is shocking at judging cases.
PS:
""Given that HMRC loses the vast majority of IR35 cases in court, how can it adequately educate and prepare the entire private sector to accurately assess the status of the contingent workforce?" asked Labour MP Paul Sweeney."
The person before said it lost about half, he says it loses the vast majority. Is one of these people lying, or is this one of those 52% is an overwhelming majority things again?
IIRC they have won only 1 case out of the last 11, or thereabouts. I don't have the time to look up the figures.
I don't know how many investigations by HMRC return an inside result which is not appealed, but it would be likely that some of those are also wrongly classified but not appealed if HMRC has such a poor record on appeal.
While I agree that 50% isn't the "vast majority" I do think it's high enough to say that HMRC don't know what they're doing.
It's either they have only half a clue, or it's the Jam side up/down Toast test, and there's no guiding intelligence but blind chance.
May as well get the casting bones out to decide...
Maybe its more a case of HMRC deciding who is caught by IR35. From the people receiving this decision then perhaps a group will take a look and accept that they are caught and take no further action. The others think they are not and appeal. HMRC may then take another look and then, possibly with more info sent with the appeal, decide they were wrong first time and remove the IR35 decision and there's no further action. This now just leaves the group where HMRC and the contractor continue to have differing views of the situation with both prepared to argue the case in court .... so maybe a 50:50 split in decisions isn't unreasonable as this is only applying to the cases where both sides consider they have an argument that wins.
https://www.contractorcalculator.co.uk/ir35_court_cases_judgments.aspx
There have been 27 cases, and HMRC has won 12. That's a 44% success rate.
However, it had a higher hit rate earlier on. This is to be expected when the legislation is fairly new and people didn't understand the rules: They were not even necessarily purposely breaking the rules, just interpreting them incorrectly.
However, if you look at recent cases, HMRC has won only 1 of the last 11 cases, which cover the last 10 years (with 1 split decision). Even if we are generous and count that split decision as a win for them, that's an 18% success rate over the last 10 years.
If these are the cases which were appealed and HMRC thought they could win (as opposed to those appealed and HMRC dropped, if they exist) then it shows quite clearly that HMRCs interpretation of the law is suspect. It is also reasonable to assume from this that there are some cases which are not appealed which HMRC got wrong.
"Of course, saying that someone doesn't understand their rules because they lose appeals is nonsense unless you also know how many cases are appealed."
There are several points on this. I'll make a few below, but this is far from an exhaustive list.
Firstly, HMRC can decide whether to contest an appeal. The fact that they are contesting cases which are being pretty much thrown out of court strongly suggests that they don't understand the rules. If they did, they would look at the case on appeal, realise it's clearly outside IR35 and drop it. Instead, they seem to truly believe these are inside cases and waste vast amounts of taxpayers money on legal fees to fight the appeal.
Secondly, this being the case, it strongly suggests that HMRC are also wrongly applying the law in cases which are not appealed. These could be people who don't have the funds, resources or will to fight the case, but they would still be being charged too much tax.
Finally, you only have to look at HMRCs CEST tool to know that they either do not understand the law or wilfully misrepresent it. The fact that MOO is excluded is, on its own, proof of this.
or perhaps they are appealing to get some of the utter nonsense Lorraine Kelly accountants came up with, struck down as nonsense by a judge. In these cases you are bound to lose some but winning one is likely to shut down the loophole for thousands of other people who were planning on using it.
If that's the case, they seriously need to sort their strategy out. They lose so many of these that all they get are precedents set AGAINST them.
I still believe it's far more likely that they are misinterpreting the law (through incompetence, wilful ignorance or outright dishonesty) and the courts are just telling them so. In the Loraine case, the judge basically told them they had completely wasted the courts time by bringing the case.
@DavCrav, there is huge anti-survivor bias in the cases that make it to court - these are the cases where HMRC feel they have a case strong enough to take to court in the first place. The fact that they lose over half of them does indeed show that they are either incompetent or negligent, and are wasting vast amounts of taxpayers' money on spurious litigation they should be dropping long before it gets in front of a judge.
"@DavCrav, there is huge anti-survivor bias in the cases that make it to court - these are the cases where HMRC feel they have a case strong enough to take to court in the first place. The fact that they lose over half of them does indeed show that they are either incompetent or negligent, and are wasting vast amounts of taxpayers' money on spurious litigation they should be dropping long before it gets in front of a judge."
No, no, no. It really doesn't. You need all of the numbers to make a judgment, and even then you need more granular data. To start with, you need:
1) Total number of decisions.
2) Total number appealed.
3) Total number taken to court.
4) Total number won/lost in court.
Without all of those data you cannot make any statements about the effectiveness of HRMC. Indeed, if HMRC are only taking to court those cases where there is a question of law to be judged, you could expect any number for win/loss, since the judge will set precedents that are not necessarily covered in the statute.
Don't get me wrong, I think HRMC are barely competent, but these data do not show it.
"Indeed, if HMRC are only taking to court those cases where there is a question of law to be judged, you could expect any number for win/loss, since the judge will set precedents that are not necessarily covered in the statute."
I have looked at a few. If that was the case, the judges wouldn't be criticising HMRC for bringing cases which are already covered by (multiple) precedents and which are basically open-and-shut outside cases.
The data available definitely covers 3) and 4). The tribunals, AFAIK, aren't full fat court cases and thus don't set precedents, only guidelines. If they were setting precedents, HMRC would be in even more trouble because judges have repeatedly ruled that MOO absolutely isn't implied while HMRC's ongoing view is that MOO exists wherever any kind of a contract exists, which the tribunal judges have repeatedly ruled to not be the case.
I believe, the data on the total number of investigations, and how many were dropped or settled was requested under FOI in the past, and HMRC refused to provide it. Draw your own conclusions from that.
The judge ruled that as she was performing 'someone else', she was classed as an entertainer and could therefore expense certain fees.
The main point in winning was a lack of mutuality of obligation and a lack of control over how and when she worked.
When you look at the complaints on all sides, any sensible entity would throw the current taxation system out of the window, sit down and define a new one after looking at all of the issues and talking to economists, political scientists, and banks. Society and technology have changed everything, but the taxation system is still based on the concept of collecting taxes from a blacksmith (is that term still PC?) who has just sold a new horse shoe a to a farrier.
A fair and comprehensive system is possible, but we have too many entities making money from the holes in the current system and opposed to anything that would actually work so all that happens is we "tweak" the rules.
... throw the current taxation system out of the window, sit down and define a new one ...
Has a look outside, no there isn't a porcine aerobatics team practicing anywhere nearby :-)
Such a change can't happen. For any mass change, there would inevitably be losers as well as winners - and those lowers would "be unhappy about it". Large numbers of "unhappy" voters means "looking for new job come next election time".
And as pointed out, there's a large industry out there that makes a living from two aspects of the tax system - one being that most people don't know enough about it to do it themselves (so "bread and butter" work for accountants doing tax returns etc), another being specialists in tax minimisation (ie knowing the little details that can be exploited to avoid, not evade, tax).
"Such a change can't happen ..."
I think that it could happen - sure, it won't be anytime soon. But when you look at how badly our current system is performing, it's likely that we are slowly walking towards a complete collapse at some point in the future ...
5 years? Luxury.
Actually, this takes me back to a thought experiment. What if we were to make no differentiation between freelance and employee in income tax, NI etc. but treat the permanence of the job as a benefit in kind. No difficult tests involved. Someone on a zero hours contract would have no benefit to be taxed. Someone on a short term contract would have a little. A permie such as a tax inspector would have a lot. MPs, being somewhere in the middle, should be able to see the advantage. The benefit in kind taxes of the permies would pay for tax rates to be lowered. The system would be transparently clear to HMRC. How different from present would the tax distribution be?
I wonder if IPSE have ever challenged the way tribunals work. (As the PCG they certainly didn't in my day.) Although a civil case should be decided on the balance of probabilities the only probability considered is whether the contract is or isn't fa contract of service and the situation is examined for indicators or that. Unless things have changed they don't consider whether it's a contract for services. If that were done the situation would have to be examined for indicators of that.
If the contract names the worker it can be taken as in indication of personal service when regarded as a possible contract of service. If it's looked at as a possible contract for services it's a key man clause and at one time the IR as was had on their site a standard contract for provision of services which included such a clause. If it was OK for HMRC's predecessor it ought to be OK for any freelancer's client.
They got pretty much ignored by HMRC during the previous consultation, all the evidence so far indicates the same happening this time around.
What needs to happen is to challenge the CEST tool in court, with the objective of (a) getting outcomes from the tool as it stands ruled inadmissible and (b) requiring that the tool takes mutuality of obligation into account, demonstrably so using the circumstances from previously won and lost court cases.
I'd settle for either but both would go some way to hog tying HMRC's ability to play fast and loose for a while... and if IPSE got this done I'd start paying them again. Right now I regard the money better spent on specialist protection.
IPSE have done both and worked with IHPA to have blatant misuse of CEST by the NHS over-ruled in Court. IPSE have also successfully helped a member pursue HMRC themselves, as our member's end-client, for compensation for HMRC's own lack of understanding of the end-user obligations created by public sector IR35.
Like any other body IPSE can only support those who come forward and are prepared to go through the Court process (whether ET, EAT, TT or law Courts). It can be arduous and time-consuming and many people fear it makes them a target.
IPSE continues to fight against IR35 https://ipse.in/IR35Hub
"How about they train their staff to do the job?"
This is a biiig problem in the tech sector. I have worked with many clients who struggle to recruit staff. The reason is often that they are trying to recruit staff who already have the entire skillset and experience they need, while not paying enough.
I have suggested to some of them that their way forward would be, rather than continually taking on contractors, to recruit some junior devs, train them up, and then pay them enough to keep them. Even in those where they do take on and train junior devs, the final point is often the stickler: they expect to continue paying junior dev rates when they can walk into a much better paid job (or go contract) as soon as they have the training and experience behind them. The employer will then rant about staff turnover and "lack of loyalty" without ever realising that they need to change their own practices to address the situation.
"Not enough staff hire some, or don’t take on work you are not equipped to carry out."
There's a built-in assumption here. That a business will require X yours of this skill, Y hours of that skill and Z hours of something else this week. And next week. And all the weeks after that. At best there may be some flexibility in that someone can swap between skills but the overall total will be fixed.
The world doesn't operate like that. Business as usual might be predictable enough* - apart from staff who are inconsiderate enough to be ill, go on holiday, have babies**, leave or even die. But there's also project work involved in launching new products, preparing for new contracts, stock-taking, handling equipment refreshes etc. And even that doesn't allow for small businesses that can't possibly justify training up someone up for advanced stuff that might amount to a day's work every few months.
By far the best strategy is to maintain properly trained staff at the right level to cope with the expected work level and count on being able to take extra help to cope with peaks of work and troughs of staff availability and one-off demands for extra expertise.
* Except when it has a strong seasonal element.
"How about they train their staff to do the job?
Not enough staff hire some, or don’t take on work you are not equipped to carry out."
That makes sense when the work being done by contractors is a part of BAU, and in fact carrying out BAU work is often considered a pointer towards employment. However the vast majority of work I get as a contractor is project based, whether it's large upgrades or migrations. Whilst staff need to know general administration of Office 365, it would be utterly pointless to train one how to do the migration, as that is a "one and done" job usually.
IT Consultants often get lumped in with, for example, plumbers and electricians. In general most companies do not keep them on staff, you call one when you need one. Even very large companies with lots of maintenance to do might have a few on staff, but moving to new premises or refurbing exiting offices would bring more in for the project.
I've come to the conclusion that HMRC are a bunch of amateurs. I've dealt with them for my personal taxation, I've dealt with them for my business taxation and, now that my company markets a product that uses their Maxing Tax Digital API, I've dealt with them as a developer (if you want a laugh, take a look at https://github.com/hmrc/vat-api). So it comes as no great surprise that they do not understand their own tax code.
"They seem to have the goal of raising as much tax as possible" - I worked on the HMRC account when it was under EDS in the early 2000's and can confirm that this is exactly the view of too many HMRC staff.
More recently that they've moved on to speculative mail-out demands for unpaid tax with no solid evidence behind the demands and according to an accountant I was talking to recently, some people are actually paying up without questioning the basis of the demand.
This kind of cowboy operation shouldn't be permitted. Period.
Well, if it was actually possible to enter all the relevant data on CEST then maybe that would be fine. I tried it out a few months ago and found I couldn't specify exactly how I work - I'm self-employed with several unrelated clients for whom I build and administer websites. Under no circumstances would anyone consider me to be employed by any one of my clients, but CEST's rabid conclusion to the restricted amount of data it allowed me to enter was that I should be registered as employed.
The whole CEST system is a stinking pile of crap and HMRC living in cloud cuckoo land with regard to its fitness for purpose is a major source of the problem. Idiots!
Arguing over how much of your labor the state can forcibly take from you?
If you think the solution to all of the worlds problems can be fixed by the retards in Parliament who can't even enact policy they said they would then you must have been starved of oxygen.
The only thing government does well is create more government, oh and waste an ever increasing amounts of taxpayers money.
Everyone I know who left the public sector contracting left because their accountant said they would face increase taxation, not about the complexities of the rules.
Once they are in use in the private sector people will have nowhere to hide and everyone will learn the rules. I expect further crackdowns anyway and further rules or laws banning nonsense like the Lorraine Kelly ruling.
Simply don't try and dodge taxes, it not worth it in the long run, especially now HMRC enforcing rules retrospectively when it clear even to non accountants schemes are dodgy. I mean if someone lending you money and you not require to pay it back, it obvious something dodgy going on there mate!
I think someone or something has got its algorithms in a tizz , it obvious , even to me , "mate". The V.A.T returns software that one is now COMPELLED to PURCHASE and use by the Hideous Mutant Rapacious Cretins is a broken piece of shit.The biggest threat to the British economy has ALWAYS been the feckless incompetent administration , please "mate" take a course in UK modern History , and shut the fuck up , you are as coherent as a microsoft talking Santa.
There are free tools to do your digital VAT returns, google is your friend. Here's one I'm looking at (not a recomendation) https://www.vatlive.com/events/webinars/making-tax-digital-update?utm_campaign=EMEA%20MKT2018%20MTD%20Filer%20thank%20you&utm_medium=email&utm_source=Eloqua&elqTrackId=c2cfd6882df44098960b3d25d253ec0e&elq=c6046519f8304b7aa96afa84ed4dbc5a&elqaid=19462&elqat=1&elqCampaignId=5678
You're not allowed to type your numbers in as that breaks HMRC rules about making things digital (hey, I'm using my digits) but if I type them into a spreadsheet and then run the above tools on it everything is OK and the "Make it all Digital" policy is a success.
"Simply don't try and dodge taxes"
This is the rub: Most of them weren't. They were genuine contractors paying the correct amount of tax for their situation. However, because the liability for any mistakes was going to fall on the engager, they all became risk averse which meant the contractors were going to be taxed more than they were legally liable for.
If you went into a job and they told you there would be "emergency tax" taken for the length of your employment, would you stand for it? What if you were told you could no longer use an ISA or get tax relief on your pension, even though legally you were allowed to? These are equivalent to wrongly declaring someone inside IR35.
"Simply don't try and dodge taxes..."
I'm employed by my own limited company, I pay NI and PAYE. I employ my wife as my PA, she pays NI and PAYE.
My contract is with an Agency and their contract is with yet another company that supplies their services to the client.
According to CEST I should be registered as an employee. Which is just silly as I already *am* an employee!
My advice is to get your contracts reviewed by a solicitor that specialises in IR35 and get the changes that they suggest applied to your contract. In every case my agency has been happy to do this, as the last thing they want is to see their revenue interrupted.
Yep, and this is why "inside IR35 contracts" should not exist. They are basically zero-hours temporary employment contracts, except with the "employer" dodging their responsibilities.
However, there is an interesting point when it comes to this: If there is no Mutuality of Obligation, is there any employment? Is a zero-hours temporary contract employment? There is no obligation for the "employee" to accept work, and no obligation for the "employer" to provide it...
If you were that clever, your company wouldn't need any contractors.
If you were that clever, you would be a team leader, manager, director or above and know where, when and how contractors add value.
Your comment though shows that you are likely not just not-clever but ostensibly pretty dumb and/or lazy.
Your only way-out is if your company has no contractors, in which it is highly likely it is a dead-end company on its way down (with dead-end, bottom-of-barrel employees)...or could be a start-up that is going to be one of the many statistics where they fail.
Contractors do pay their taxes.
"if you were that clever you wouldn't be working as a contractor"
I think you have things backwards. It takes intelligence, skills, experience, and a whole host of other things to make a success of running your own business, which is what being a contractor is. Any tax advantages are small and mainly come from the overheads and flexibility of running your own business. You must maintain insurances, keep accounts up to date, pay a myriad of taxes, plan to keep a steady flow of work, advertise and market yourself, and budget and plan for holidays, sickness and any other times you are unable to bring in an income. All of these things are taken care of for you as an employee.
In short, being a contractor is completely different in both practice and mindset to being employed. If you can't see that, maybe it's your intelligence which should be called into question.
>being a contractor is completely different in both practice and mindset to being employed
It can be, and should be, but we all know of contractors who have sat at the same desk, doing the same work, year after year, and just paying less tax than the permie doing much the same job at the desk next to them and this is what winds people up.
Pretending that there was never an issue here is disingenuous and helps no one.
All of us, contractor or permie should want that situation to end - no employer should be able to dodge their responsibilities by claiming an employee is a contractor, and noone should be able claim they are a contractor with the sole intent of reducing their tax bill.
Those of us who genuinely want to employ contractors for short-term projects should not have to worry about anyone querying the status of those workers and screwing project budgets up, those of us who want the flexibility or other opportunities that come from running ones own company should not have to worry that someone lazily swerving their obligations might get a spanner thrown in the works.
There are "contractors" who are to all intents and purposes permies on a tax dodge and we shouldn't be defending them or we lose the moral high ground.
"There are "contractors" who are to all intents and purposes permies on a tax dodge and we shouldn't be defending them or we lose the moral high ground."
I agree. However, the impression out there (especially at HMRC) is often that this is the majority, whereas in my experience they are by far the minority.
This is why "Inside IR35 contracts" should not exist: You care a contractor, running your own independent consulting business, or you are an employee (perm or temp). By aligning tax and employment law and allowing the liabilities, rights and responsibilities to be fairly split, these fake contractors would become rarer and rarer: Companies would not be willing to take on "fake contractors" if they would be held liable for employers NI, holiday/sick pay etc, and more of these roles would be advertised as temp roles rather than contractor ones. On the other side, these "fake contractors" would be more willing to take on temp roles.
There is often the instinct to fight back against the "all contractors are tax dodgers" rhetoric by arguing the opposite, that none are. This is an understandable reaction, but you are right, it doesn't help the case to do so.
"Just pay your fucking taxes like the rest of us, you selfish bastards, and stop trying on clever-clever dodges to wriggle out of it. Because, to be brutally frank, if you were that clever you wouldn't be working as a contractor."
How about you stop blaming contractors for your own failed career? Because if you had the skills and the balls, you would be doing it too.
"Just pay your fucking taxes like the rest of us, you selfish bastards"
Have you ever considered going freelance yourself? If so why didn't you. Was it some altruism about wanting to be taxed as employee instead of as a business? Or did you not fancy taking the risks of running a business?
It's not about the name, it's about the liability in relation to the tax code.
A limited company is a limited company, regardless of the number of shareholders.
HMRC are treating limited companies with 1-2 shareholders differently, and are trying to squeeze more taxes out of them, in a dangerously retroactive fashion.
Effectively they are enforcing double standards, and a different interpretation of the tax code. On the other hand, they seem to be happy to let jobs go to big consultancies that do not pay taxes in the UK at all.
HMRC ? Is it time to declare a war on The Taxis Of Weevil ? I have no problem whatsoever contributing to the cost of a fair society,administered by competent government which avoids spunking hard earned tax on doomed insider projects fueled by arrogant murderous privilege , the list of these "projects" is a long one , rather like this sentence , it just goes on and on and on , like some kind of hideous gift . Heh .Pay your taxes and claim the moral high ground ? That fucking lie has got everyone well exercised and you thought leaving the European Union was all about xenophobia......dumb at the least , but more likely "On The Gravy Train" or "Snout In The Trough" , like Bill Hicks "advertising execs" , be a service to society , just kill yourselves ! It could be your one noble act. Where is Ambrose Bierce............
IR35 was "supposed" to be designed to stop companies doing exactly what the BBC have done, by forcing people off the payroll to save themselves ENIC costs and so on. The sample scenario was "Friday Employee to Monday Contractor".
However, it's very rarely used in this way, seeing as individuals are getting hauled over the coals by HMRC and the BBC are being invited round for a chat to discuss the way ahead instead of getting their pants pulled down.
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