Crystal Umbrella

A startling decrease in the number of IR35 status reviews has occurred over the last few years, according to new data released by HMRC. The amount of tax raised through the investigations has also plummeted dramatically.

The information was disclosed in response to a request to HMRC about the number of IR35 status enquiries it has undertaken over the last five years. The figures show that 158 reviews were undertaken in 2006/7 and only 104 the following year. Subsequently, the number dropped precipitously: only 25 took place in 2008/9 and a mere 12 in 2009/10, rising feebly to 23 in 2010/11.

Tax yields from the reviews don’t always correspond to the year in which the investigations took place, but the money raised has also undoubtedly been declining just as sharply.

The HMRC data also shows that it’s not just the number of IR35 status reviews that has shrunk massively in recent years: the amount of tax yielded as a result has also nose-dived, falling from almost £2 million in 2006/7 to a paltry £155,502 in 2009/10. The sum for 2010/11 was £219,180, almost a tenth of that raised just five years earlier.

The lamentable numbers are likely to undermine any continuing justification for retaining IR35. The PCG’s Managing Director, John Brazier, said that the figures confirm what his organisation has always maintained – the tax yield from IR35 is “minimal” and the damage it has done to the UK’s 1.4 million freelance businesses “is completely unnecessary.”

Brazier believes that it is becoming increasingly difficult for the Treasury to justify the continued existence of “this unwarranted measure.” Is that a death knell tolling in the background?

The Liberal Democrat Working Group on Information Technology, headed by Cambridge MP Julian Huppert, maintains that a Nick Clegg-led government would ditch IR35.

More precisely, IR35 would be suspended to enable a data-gathering process aimed at ‘permanent abolition’ of the much-criticised legislation, a Liberal Democrat paper on the future of the digital economy argues. Entitled Preparing the Ground, the document appears to have sown as much confusion as hope amongst the UK’s contractor community. The chief reason is that it refers to the deleterious effects of HMRC rules on IT contracting but fails to mention contractors equally affected who work in other sectors.

Nonetheless, the paper constructively revisits some of the issues that could so easily succumb to social amnesia – namely, the alternatives set out for IR35 reform by the Office of Tax Simplification (OTS). In particular, it draws attention to the options the government rejected – the development of a new ‘business test’ (option one) and the immediate suspension of IR35 to gather additional information on the effects of permanent abolition (option three). This is the option the Lib Dem document argues is the preferable one.

Freelance trade group PCG endorses this view, stating “Our position remains that we support the suspension of IR35 and we look forward to discussing this new report with Julian Huppert MP who heads the report in person in the near future.”

The PCG went on to say that the Government, which Mr Huppert supports, opted in the 2011 Budget to go for option two – improved HMRC administration of the regulations. Is dissension stirring in government ranks? Watch this space – we’ll keep you informed.

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.

The Government’s decision to retain IR35 has come in for yet further heavy shell fire, this time from a prominent contractor and former external director of the freelance trade group, PCG.

In a letter to the contactor news outlet Shout 99, Phil Ross didn’t mince his words. He claimed that the Coalition has “blown it” as far as seizing an opportunity to IR35 was concerned and expressed his “bitter disappointment” in the government’s failure to act more decisively.

In his outspoken response to the decision, Mr Ross accused both the Conservatives and the Liberal Democrats of doing a U-turn on pre-election promises made in private to contractors and small business leaders. He believes the Coalition should have abolished IR35 within their first 100 days of taking office, a move which would have powerfully signalled that they were trustworthy enough to stick to their promises. Instead of the abolition or reform expected by the UK’s freelance community, they have ended up with “nothing but tepid words about working more closely together with HMRC.”

He argued that the previous Labour administration had declined his suggestion of a limited liability self-employed scheme to compliment the limited liability partnerships it had introduced, chiefly because ministers had not wanted to “deny themselves the huge tax yield that HMRC promised IR35 would deliver.” He believes that Chancellor George Osborne has fallen for the same questionable argument from HMRC as his Labour predecessor.

He urged contractors and the PCG to redouble their efforts to win the social and economic arguments in favour of IR35 abolition.

Contractors working for umbrella companies or limited companies may be interested to hear that the PCG has been asked by the Government to join the new IR35 Forum, which meets for the first time in May.

The Forum was set up after the Government’s decision to retain the controversial IR35 legislation, despite trenchant opposition, but improve its administration by HMRC. Exchequer Secretary David Gauke recently met with senior representatives from HMRC, HM Treasury and the PCG, which pressed the need for greater consistency, transparency and clarity over IR35. Mr Gauke agreed that this would indeed be a priority.

The Forum will be monitoring and evaluating the administration of IR35 by HMRC. At its inaugural meting next month, terms of reference will be formulated to ensure that the views of the freelance contactor community are heard in addition to those of the Revenue, Government and Treasury.

There is widespread agreement amongst organisations such as PCG, the Office of Tax Simplification (OTS), accountancy firms, tax experts and small businesses that HMRC has much work to do in order to improve its performance in this area. The Forum is, however, intended to be a constructive body, assisting in the improved implementation of IR35. Nonetheless, even officials from HM Treasury now openly acknowledge that HMRC needs to improve its performance considerably.

PCG Managing Director John Brazier said that he had been assured that the Forum would not be a “talking shop” but a “positive force for change.” A “genuine climate for change” in the HMRC’s administration existed, he added, and promised that PCG would do everything in its power “to deliver that change and to ensure the best business environment for freelancers.”