HMRC slammed for its response to IR35 inquiry

Industry experts slam HMRC for ignoring much of House of Lords concerns raised in its IR35 inquiry

The House of Lords finance bill sub-committee published its findings from the off-payroll working follow-up IR35 inquiry earlier this year – and HMRC has now issued its response.

The report examined the impact of IR35 reform in the private sector and ultimately found that HMRC “failed” to address the issues around the off-payroll rules.

Financial Secretary to the Treasury, Lucy Frazer, has written a letter to the House of Lords, responding to its findings and recommendations.

HMRC maintain CEST is accurate

The sub-committee found that HMRC’s CEST tool was largely described by businesses and contractors as “not fit for purpose” given it failed to give a status determination in 20 per cent of cases and did not address Mutuality of Obligation (MoO).

It asked the tax authority to clarify that CEST is not a “substitute for law” and to modify the tool to include questions on MoO.

In the letter, seen by Contractor Weekly, HMRC highlighted that it is not mandatory for businesses to use CEST, and it will “review the current signposting for customers who receive an ‘unable to determine’ outcome.”

However, it all but ignored concerns relating to MoO and instead stated that the tool makes a “presumption” that a contract is in place and therefore the requirements for MoO are met.

HMRC went on to add that it “remains confident that CEST is accurate in the cases where it gives a determination” and “will stand by its results.”

Blanket determinations are “extremely rare”

The House of Lords inquiry also found that the trend in blanket determinations had continued since the introduction of reform in the private sector. It suggested stricter action on firms that are making such decisions.

In response, HMRC pointed out how it has “published its compliance approach to strengthen its commitment and provide transparency” for businesses to comply with the rules.

While the tax office agreed that blanket assessments are not compliant, it highlighted that according to research HMRC had commissioned, this is “extremely rare”, but does not provide any information on how it would tackle this issue.

It also added that if organisations choose not to hire contractors as a rule then it is a “legitimate business decision.”

HMRC claims compliant firms will make “small net saving”

In the follow-up report, the sub-committee wrote that “HMRC failed to appreciate the burden of costs” the new rules had on businesses and in some cases, this was being passed on to contractors via reduced rates.

Although HMRC has revised its initial estimated cost to businesses, it says that despite this, going forward compliant companies will in fact have a “small net saving per year.”

Regarding organisations passing the cost of paying national insurance contributions to contactors, the tax watchdog does not recognise this as an issue.

Instead it stated: “At an economy wide level, it is standard for employers to set wages with regard to the overall tax bill, and this will be the same whether someone is engaged directly or as a contractor.”

Umbrella regulation to be considered when “time allows”

Another key finding from the House of Lords IR35 inquiry was the increase in the use of umbrella companies – particularly rogue intermediaries often associated with tax avoidance schemes.

It asked HMRC for a timescale on what action it proposes to take to regulate this sector and to bring the legislation forward to create the Single Enforcement Body (SEB).

Rather than offer a date, HMRC simply said in response that it will be “brought forward when parliamentary time allows.”

Derek Cribb, CEO of trade body for the self-employed, IPSE, commented on HMRC’s response to the inquiry: “Despite two damning reports from the House of Lords and swathes of written and oral evidence from IPSE and others on IR35’s failures, HMRC continues to defend the flawed legislation.

“Rather than acknowledging the issues around the [CEST] tool in their response, HMRC has ignored the inaccuracies, despite a number of government departments including Defra falling foul of IR35 after using the tool.

HMRC do not go far enough in IR35 inquiry response

“HMRC’s response also doesn’t go far enough on blanket assessments by clients, which ignore the individual differences between self-employed workers and could result in thousands of freelancers and contractors being caught by the legislation.”

He added: “HMRC should stamp out blanket assessments and work with the Treasury to provide clearer rules for businesses looking to engage contract workers.

“Going forward, the government and HMRC must also expedite their research into the impact of IR35 in the private sector, rather than relying on previous research carried out in the public sector in 2017 to justify the flaws surrounding the legislation.”