It has been more than six months since IR35 reform was introduced in the private sector on 6 April 6 2021 – probably the most significant moment in the history of the controversial IR35 legislation’s history.
Changes to IR35, a similar version of which was rolled out in the public sector in 2017, mean medium and large businesses are now responsible for determining the tax status of contractors.
In other words, it is up to the end client (rather than the contractor) to decide if the working relationship resembles a self-employed engagement or employment. As part of this reform, the fee-paying party (either the end client or recruitment agency) now shoulders the liability.
So how has contracting fared? How have businesses coped? What is the state of play and what does the future look like for this vitally important sector of the UK labour market?
I will not gloss over the fact that some businesses – even large parts of industries – continue to uphold needless contractor bans, as a direct response to IR35 reform. But forcing genuine contractors to work on the payroll is a short-sighted, not to mention expensive move.
However, on the whole, refusing to engage contractors is the exception, not the rule. True, reform has seen far too many true contractors either automatically deemed inside IR35 or left with no option but to work via umbrella companies, but this is not the case across the board.
Our own study, which well over 1,000 contractors participated in, showed that upon the introduction of IR35 reform, one in three were still operating outside IR35. While it is not the figure we would have hoped for, it is at least a firm foundation from which to build. And in recent months, there have been notable signs of progress.
Let us start with one of the promising developments – news of Network Rail’s IR35 U-turn. It recently became clear that this government body had reversed its initial blanket ban on contractors.
In 2019-20, 99 per cent of contractors engaged had been placed inside IR35. Fast-forward to 2021-22 and 74 per cent now operate outside IR35.
This is a far more accurate split, in our opinion at Qdos, where we have advised that 87 per cent of the 32,000+ contractors assessed on behalf of businesses belong outside IR35.
While Network Rail is a public sector body, I am optimistic that its IR35 rethink will motivate private sector businesses to act – in fact, some of our own clients have changed tack in recent months.
Many banks, financial services companies and even automotive companies could learn a lot from Network Rail – not to mention the thousands of other organisations that continue to prove IR35 reform is manageable.
The cost of non-compliance
With IR35 reform in play, HM Revenue & Customs has wasted no time in policing compliance.
Letters have now been received by a number of businesses in the energy and financial services sectors, with the tax authority keen to get a clear understanding of the processes in place for ensuring compliance.
You only need to look at the public sector to realise the true – and quite staggering – cost of non-compliance. It emerged in the past few months that the Department for Work and Pensions, Home Office and HM Courts & Tribunal Service have each been hit with IR35 bills that together exceed more than £120m. It is therefore vital that companies engaging contractors are confident they have the processes in place to manage these changes in accordance with the law.
On that note, I feel it is worth stressing that the one-year ‘soft landing’ for IR35 reform promised by the government is a red herring. This so-called ‘light touch’, which means HMRC will not hand out penalties for non-compliance until 2022-23, should not distract businesses. After all, tax liabilities for non-compliance will still be issued – and in IR35 cases, tax liabilities dwarf penalties issued by the tax authority.
The controversy surrounding HMRC’s ‘Check Employment Status for Tax’ tool continues. This is despite the much-criticised technology having been in use for more than four years now.
Damning usage data for this tool published in September cast the spotlight back on one of Cest’s biggest flaws – its inability to make up its mind 21 per cent of the time. Of the 1,125,408 IR35 determinations it was asked to make between November 2019 and August 2021, Cest came up with nothing on 233,631 occasions.
That is potentially hundreds of thousands of contractors and businesses left in no man’s land with regards to their IR35 compliance.
Cest’s flaws extend beyond this, though. The tool has been dismissed in numerous tribunals, fails to consider all aspects of IR35 case law and can be overruled at HMRC’s will.
It goes without saying that neither businesses nor contractors should rely on it to assess IR35 status – it actually poses a risk to compliance, believe it or not. Fortunately it is not mandatory.
In the background, a tax case is rumbling on that could have huge implications, not just for the future of Cest but for hundreds of thousands of IR35 determinations made by the tool. If HMRC was to lose this case, it would also raise serious questions about the tax office’s grasp of the very employment status rules the tax office designed and looks to enforce.
Mutuality of obligation
PGMOL v HMRC is a £584,000 employment status case involving professional football referees who the tax authority argues are not self-employed, but in fact should have been engaged by Professional Game Match Officials Ltd as employees.
This case centres on whether ‘mutuality of obligation’ existed between the two parties.
By this I mean was there a mutual obligation for PGMOL to provide paid work and for the referees to accept this? If 'Moo' exists, it could mean the referees should have been engaged as employees, with PGMOL left to foot a mammoth tax bill, made up of missing employment taxes.
The latest verdict, issued by none other than the Court of Appeal, means the case will be reheard at the First Tier Tribunal in due course. But if, here, HMRC’s argument – that Moo exists in every engagement – is thrown out, then in theory, every IR35 determination made by Cest (which assumes that Moo exists in every engagement) could be called into question and possibly even overturned.
Realistically, we are some way off from knowing the final outcome of PGMOL v HMRC. Even so, there is no hiding from the fact that it could play a big role in the future of IR35 decision-making and prove to be the final nail in Cest's coffin.
From Cest, to HMRC’s IR35 compliance activity and IR35 U-turns, there is no shortage of issues impacting contractors or the businesses engaging these workers in the post-IR35 reform world.
Granted, some are a cause for concern, but others offer hope to this vitally important sector of the labour market at a time when its agility and dynamism is needed more than ever before.
Seb Maley is chief executive of Qdos
