Crystal Umbrella

A week is a long time in politics, Harold Wilson famously declared; it also appears true of the IR35 Forum, amongst whom unseemly divisions are erupting.

Just a week ago, the Forum appeared united, opposing the new ‘business entity test’ as weighted and selected by HMRC. All parties seemed to endorse PCG Chairman Chris Bryce’s view:

“HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35. While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed.”

Then Kate Cottrell, an IR35 expert from the employment law specialists Bauer and Cottrell, advised directors of limited companies, potential targets of the regulations, not to panic. Dissenting from the PCG view that the new HMRC test amounted to a major “missed opportunity,” Ms Cottrell said in a statement to industry news source Shout99:

“These tests are a minor part of the administration of IR35 and as the IR35 legislation has not changed, failure to put in place an easy business test cannot be seen in my opinion as a missed opportunity as there was no opportunity.”

In other words, provided contractors running legitimate limited companies carry on as before by keeping up their tax investigation insurance, reviewing their contracts regularly and ensuring professional confirmation of arrangements, they will be fine.

The PCG, for its part, disagrees with Ms Cottrell and considers the test as is stands to be a threat to contracting.

Maybe it is time to start seeking the best PAYE umbrella solution.

HMRC has finally published its new business entity tests – and they are every bit as bad as leading industry figures from the IR35 Forum feared, being weighted in such a way as to place most contractors working through limited companies in medium to high risk categories.

HMRC appears to have completely disregarded advice given by a plethora of organisations, including the Federation of Small Businesses (FSB), the Association of Professional Staffing Companies (APSCo), the Freelancer and Contractor Services Association (FCSA) and, of course, the PCG and REC. Instead, it has ploughed ahead with its own selection of questions and its own weighting system, wholly unmodified by key suggestions for improvements.

There are significant changes to the administration of the regulations, however, including an improved helpdesk, clearer guidance, better trained Revenue teams and more detailed IR35 scenarios; however, the business tests are widely perceived as a retrograde step.

APSCo’s Ann Swain expressed her organisation’s “exasperation” at HMRC’s refusal to listen, while PCG Chairman Chris Bryce said:

“HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35. While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed.”

The FCSA’s Martin Hesketh condemned the tests for pushing a “disproportionate number of businesses into the high risk category,” a move which will obscure the identification of genuinely high-risk cases.

The tests may evolve over the coming 12 months, but expect the ranks of those opting to work through umbrella companies to swell.

The ranks of contractors opting to work through umbrella companies could well be about to swell if HMRC ploughs ahead with its unilateral plan to weight criteria for assessing IR35 liability. Further details are emerging about the questions and weightings likely to be used.

Although the business entity test has been deferred until May, questions have been weighted according to HMRC’s own criteria. Only contractors scoring 21 points or above will be designated as ‘low risk’, while those scoring 11 to 20 points will be considered ‘medium risk’ and those scoring 0 to 10 points as ‘high risk’.

Questions such as “Were you previously a PAYE employee for the client you are now contracting for in the last financial year?” will count as minus 15 points, and if professional indemnity insurance is required (very common in the contracting community), contractors will score a paltry two points. Limited company contractors with dedicated business bank accounts and frequently updated business plans will score a mere one point. Those with employees contributing 25% to turnover – a tiny minority – will score a thundering 35 points, taking them safely into the low risk category.

If a contractor has been unable to recover payment amounting to over 10% of annual turnover in the last two years (a not uncommon scenario), the weighting is ten points.

These are but a snapshot of the questions and weightings HMRC appears determined to implement, against the advice of business groups. As they stand, it would appear that the majority of contractors currently working through limited companies in the UK would find themselves at medium to high risk of being caught by IR35.

New Freedom of Information data obtained from HMRC by the PCG reveals that the Revenue’s tax yield per individual IR35 investigation increased ten-fold over the last five tax years.

While IR35 cases yielded only £1,700 each on average until 2005/2006, the haul per case soared to almost £17,000 between 2006 and 2011. The data suggests better targeting by HMRC. In the first six years of the notorious regulations’ existence, the Revenue investigated 3,886 IR35 cases, which collectively netted £6.7 million. But between 2006 and 2011 only 322 cases were investigated, generating just slightly less – £5.4 million.

Even so, a leading chartered accountant and IR35 expert, Paul Spindler, remains decidedly underwhelmed by the figures. Over ten years, he noted, the average yield remains “shockingly low” at just £3,500 per enquiry. He shared his suspicion that many of HMRC’s IR35 enquiries have resulted in “no [tax] recovery whatsoever.”

HMRC has so far only revealed a “snippet” of the whole IR35 story, he added, making no mention of taxpayers who, like contractors working through umbrella companies, have opted for PAYE as a direct result of the legislation.

Mr Spindler’s views were endorsed by two other IR35 experts, Seb Maley of Qdos and Kate Cottrell of Bauer & Cottrell. Both believe that focusing on the apparent ineffectiveness of IR35 overlooks its “deterrent effect”, which may be the very factor that generates the most revenue for the Treasury rather than IR35 enquiries themselves.

The latter have fallen, they suspect, partly because HMRC is targeting higher risk workers, and partly because freelancers are learning how to operate outside of IR35 danger, such as taking the PAYE umbrella option.

In keeping with its promise to improve HMRC administration of IR35 regulations, the Government plans to set up dedicated helplines throughout the UK and staffed by specialist advisers.

Exchequer Secretary David Gauke and Office of Tax Simplification Director John Whiting were joint signatories to a letter to the OTS Chairman, Michael Jack, confirming that immediate abolition of IR35 was now off the government’s agenda, as indeed was the introduction of a new business test to assess whether or not individuals should be classified as self-employed.

As is well known amongst the UK’s contracting community, IR35 legislation has been dogged by sustained criticism for its lack of clarity over the issue of self-employment.  Many freelancers consider it excessively punitive and fatally ambiguous, so the government’s decision to retain it has not passed without some considerable controversy.  However, Chancellor George Osborne has insisted that the administration of the notorious regulations by HMRC will be substantially improved, and the dedicated helplines appear to be a clear step in this direction.

The letter makes clear that the helplines are actually part of a series of measures designed to improve IR35 administration.  Others include the publication of new guidance on the type of cases HMRC consider beyond the scope of IR35, restricting reviews to high-risk cases in order to promote a more tightly targeted approach to compliance activity, and the continuing monitoring of HMRC’s new approach by the newly created IR35 Forum.

Mr Gauke explained that the option of a new business test was discarded because, after due consideration, it was felt to be too challenging to devise in such a way that it would work for both business and HMRC.

A specialist in IT contracting has won a five-year long battle with HMRC over her IR35 status, the news outlet Shout 99 reports.

Elaine Richardson, who owns ECR Consulting Ltd, was accused in November 2005 of being a disguised employee.  As with a significant number of contractors who work through their own limited companies, she fell victim to the ambiguities surrounding IR35 from that moment onwards.  At the time, she was working as a freelance contractor for the firm Vertex Data Science; should HMRC have succeeded in designating her as a disguised employee, she would have faced a wounding tax bill of more than £50,000.

Thankfully, her recent tax tribunal found that on all three key status tests, her company was clear of IR35.  The tests – mutuality of obligation, substitution and control – clearly proved to the tribunal that ECR, in its wording, “is a genuine business and therefore not a target of the IR35 legislation.”

The tribunal ruling went on to acknowledge that ECR operates from a dedicated business area at Ms Richardson’s home, has a company domain and a website and advertises its services as a member of the PCG.  It has, the ruling continued, “… retained reserves and invested in development and has over the years taken on fixed price work for a variety of clients”.

Ms Richardson was represented by tax specialist Matt Boddington of Accountax Consulting, who expressed his satisfaction in the findings, saying that the Tribunal “had their commercial heads on and understood that contracting through a single person limited company is a prudent and sensible method of providing freelance services, and not about disguising employment”.

His views were endorsed by PCG Chairman Chris Bryce, who added that his organisation aims to “take all legitimate freelancers out of the scope of IR35”.

The IR35 Forum, set up to improve HMRC’s handling of IR35 regulations, met for the first time on May 6th, an event which has been welcomed by the Recruitment and Employment Confederation (REC).

Many amongst the UK’s contractor workforce wish to see a drastic reduction in the number of IR35 cases investigated by HMRC, despite the Chancellor’s decision to retain the controversial legislation in his March Budget. The REC, which had been closely involved in the Office of Tax Simplification’s review of small business taxation, was instrumental in setting up the new Forum. Along with several other specialists representing the interests of the UK’s contractor community, the REC will be participating actively in the Forum to improve HMRC’s administration of the regulations.

Commenting on the inaugural meeting, the REC’s head of Policy, Gillian Econopouly said that she was pleased that the IR35 Forum is now “up and running,” adding that the REC has been asked to contribute, “placing the views of the recruitment industry at the heart of these reforms.” She went on to say that ministerial support for the new body was “reassuring” and added that the task was now to “come up with practical solutions for improving how the IR35 rules are administered on the ground.”

Ms Econopouly made it clear that she and many others would have preferred to see “a more drastic reform of IR35” but insisted that the new Forum genuinely provides an opportunity for real improvements. The REC, she continued, is committed to working with the Forum to improve the system and “establish more certainty for contractors, their hirers, and the recruiters that find work for them.”

A prominent Treasury Minister has made it clear to the PCG (formerly known as the Professional Contractors Group) that he is committed to working with contractors and other freelancers to establish genuine improvements in the administration of IR35 rules.

David Gauke MP, who is Exchequer Secretary, described contractors and freelancers as a “significant and important part of the business community.” He acknowledged concerns amongst the contracting community about the willingness and ability of HMRC to make real improvements in its handling of IR35 cases but insisted that he believed the Revenue was genuinely committed to a complete overhaul of its present administration of the regulations.

Mr Gauke went on to express his commitment to getting the administration of IR35 right in order to ensure fairness in the tax system and to enable professional contractors “to provide their services in the most appropriate way.”

PCG Chairman Chris Bryce welcomed Mr. Gauke’s personal commitment to ameliorating the “major difficulties” faced by freelancers over IR35 over the last 11 years. He went on to say that the new IR35 Forum, which meets for the first time today (6th May), offers the prospect of making “a real difference to the uncertainty around IR35 and issues such as the unacceptable length of many IR35 investigations.

He reasserted the PCG’s determination to deliver “clarity, transparency, and consistency” for the freelance community, adding that his organisation takes the challenge very seriously: “We are determined to clean up HMRC’s administration of IR35 once and for all.”

Many freelance contractors, perhaps especially those working through limited companies, may be encouraged by these comments and commitments.

The Recruitment and Employment Confederation has stepped in to the ongoing debate about the future of IR35, arguing that HMRC’s focus should now be on detecting the very small number of genuine examples of disguised employment in the UK rather than assuming that all freelance contractors are potentially subject to the rules.

Jeff Brooks, who chairs the REC’s Technology Group, underlined the importance of finding ways and means of focussing the system “on the rare cases of actual disguised employment.” It was essential, he added, to “make sure that the vast majority of contractors who have done nothing wrong don’t have to worry about being subject to HMRC investigation or tribunal that could last years.”

The REC is one of several prominent groups to be invited to join the newly created IR35 Forum, which was set up after Chancellor George Osborne’s budget decision in March to retain the controversial legislation but improve the efficiency of HMRC’s implementation of the rules. IR35 was introduced by the previous Labour government and was designed to prevent unfair tax advantages by employees switching to questionable “self-employed” status (e.g., returning to the same company and doing the same work under a supposed self-employed contract).

Mr Brooks insisted that IR35 rules have to date been counterproductively complex, with the result that they have generated a great deal of unnecessary uncertainty and made the system “unacceptable to contractors and the recruiters who find them work.” Moreover, this complexity and ambiguity has also wasted “countless hours of tax officials’ time.” It was, he said, in the best interests of all parties to find a more rapid and more efficient way of stamping out the few real instances of fake self-employment.

As rumours continue to circulate that IR35 abolition was never seriously on the table for Government consideration, the Office for Tax Simplification has moved to pole-axe further speculation. The freelancer group PCG has come in for particular fire by some commentators in the UK’s contractor community, with accusations emerging that it backed down from calling for outright abolition after a tip-off that it would fall on deaf ears.

In a forthright statement, the OTS has refuted such accusations, as well as speculation that it was less than impartial in its advice to Government following its review of small business taxation. In an interview with the news outlet Shout99, an OTS spokesman insisted that the organisation had considered a wide range of options for IR35, including abolition.  Ultimately, the OTS report came down in favour of two: suspension pending eventual abolition, or retention with significantly improved administration by HMRC. A third option was also put forward – the application of a “genuine business test.”

He was robust in his defence of the OTS’ impartiality: although the Chancellor chose the first option, the report did not give any of the three options more limited consideration than the others. His comments were corroborated by a statement from the Treasury, which confirmed that the retention decision was made by the Chancellor after full consideration of all the options laid out in the OTS review. The Treasury remained concerned about the potential for a significant loss of legitimate revenue if IR35 abolition was pursued.

One OTS Committee member, Crawford Temple from Professional Passport, condemned rumours that the decision was a “done deal” months before the publication of the OTS review as completely unfounded.