‘IR35’ – whatever next?

20 August 2018

This article was featured in the September 2018 issue of the magazine.

Justine Riccomini ChFCIPP, head of taxation (Scottish Taxes, Employment and ICAS Tax Community) for ICAS, considers the latest consultation in the context of both the overall employment status debate and feedback from the impact in the private sector the first year of the public-sector regime

HM Revenue & Customs (HMRC) recently launched a consultation, which closed on 10 August, on whether revised intermediaries (‘IR35’) regulations should be introduced in the private sector. To enable bodies like the Institute of Chartered Accountants of Scotland (ICAS) and the CIPP to respond, it is important to reflect on the initial findings arising from the introduction of these measures into the public sector in April 2017. The public-sector regime places a new deductions and reporting responsibility on the public sector body (PSB) which engages an individual providing services through an intermediary. In addition, the ink is barely dry on the submissions made to the Department for Business, Energy & Industrial Strategy, HM Treasury and HMRC on the employment status consultation (https://bit.ly/2nTDhb5). 

Under the public-sector regime, the PSB must deduct income tax under pay as you earn (PAYE) and National Insurance contributions (NICs) from the amounts paid to the intermediary where it establishes that the individual would have been classified as an employee were it not for the existence of the intermediary. PSBs are encouraged to utilise HMRC’s check employment status tool (CEST) (https://bit.ly/2mSlIWu) to determine employment status; HMRC maintains that it will “stand by the result given, unless a compliance check finds the information provided isn’t accurate”. If the payer of the intermediary is a recruiting agency, the agency is responsible for the PAYE tax and NICs where the public authority notifies them that IR35 applies to the arrangement. Previously, the onus was on the individual to determine whether the IR35 legislation applied to them on a case by case basis. 

According to HMRC, around £1.2bn per annum is lost in tax revenues because it estimates just 10% of the businesses that are supposed to be accounting for their income using the IR35 rules are actually doing so. They have concluded this largely because of the exponential rise in new companies via Companies House which only have one director, compared to the small amount of companies that have registered with HMRC as falling under IR35.


...launched in 2000, IR35 has been an area of great complexity...


This tax gap is created because HMRC perceives that most service providers operating through an intermediary such as a limited company are paying themselves a salary roughly equivalent to the income tax personal allowance, which enables them to pay just enough NICs to qualify for state pension and benefits entitlements, with little or no income tax, whilst taking the rest of their income by way of dividend. The perceived loss to the exchequer is of Class 1 NICs on gross taxable income and any differential payable by way of dividend tax when compared to income tax. 

From a Scottish perspective, it is in Scotland’s interests to maximise those paying income tax whilst minimising the tax receipts on savings and dividends income. Wales commences its devolved income tax programme from April 2019, so a similar issue will apply there then.

On the same day HMRC issued the private sector consultation document it released the findings of a report (https://bit.ly/2IvjR5b). These go against some of the existing commentary on the public sector IR35 reform, stating that the new regulations had merely a “minimal impact on how public bodies recruit”. According to the report, an almost unanimous (97%) confidence exists amongst the public bodies surveyed that they were compliant with all aspects of the reforms by July 2017, whilst half declared they had experienced very few problems in complying.

Compare this, however, to the study by the Chartered Institute of Personnel & Development (CIPD) and the Association of Independent Professionals and the Self Employed (IPSE) which concluded that just over half of public sector hiring managers perceived skills shortages had arisen because of the rules changes, and almost three quarters (71%) were facing retention issues. The CIPD/IPSE study, which surveyed 867 contractors and 115 managers, also found the admin burden may have been adversely affected, with 80% having witnessed a rise in workloads relating to the hiring and payment of contractors. In addition, evidence of large-scale projects being stalled or cancelled, including Transport for London and the National Health Service (NHS), was found. 

Since its launched in 2000, IR35 has been an area of great complexity, not made any easier by the behaviours which led to the advent of umbrella and managed service companies – which in turn led to more anti-avoidance legislation being created. For the adviser, it is difficult to give bulletproof advice and, let’s face it, clients are generally busy trying to make a living rather than deciding what the best vehicle is for them to operate a compliant business. 

More tests and jargon seem to have been brought in to the mix – ‘hypothetical contract’, ‘supervision, direction and control’, ‘badges of trade’, ‘intermediaries’ – to name but a few. This does nothing to increase engagement by taxpayers and makes the situation opaque. 

As regards cases that reached court, in 2018 alone HMRC has lost two out of five, and since 2000 it has lost half of the 24 cases which have come to court. HMRC recently suffered another defeat at the First-Tier Tax Tribunal in the case of Jensal Software Ltd (https://bit.ly/2uyA0ks) which harks back to the days of the famous Hall v Lorimer case, where Mummery J said that a decision must be made on the overall fact pattern, rather than cherry-picking details. HMRC has lost more cases than it has won on IR35, which is a concern, particularly when HMRC has imposed new regulations on the public sector and is currently considering whether to do so in the private sector.


...does not take adequate account of or fully examine the principle of mutuality of obligation... 


Regardless of the above defeats, the much-heralded success of the Christa Ackroyd Media Ltd v Revenue & Customs case (https://bit.ly/2LgEHtE), which HMRC won, appears to have strengthened its resolve to open up investigations into another 100 television presenters. Time will tell as to the outcome.

Though the aforementioned CIPD/IPSE report noted the main problem was down to difficulties in using HMRC’s CEST tool, another problem revolved around disputes with agencies and the individuals themselves over what status should apply, with some recruiting agencies reportedly deliberately not operating PAYE where the public authority had advised them they needed to do so. 

Some commentators have criticised the public-sector reform, stating that the flexibility and confidence within the labour market was being compromised. It is too early to analyse the actual impact on recruitment and retention, continuity of service and overall agility within the public sector because the vast majority of self-assessment returns have not yet been submitted for the 2017–18 tax year – the deadline being 31 January 2019. 

It is also not clear whether the right decisions on status are being made by public authorities, that may simply see the whole thing as a tick-box exercise which is impeding day to day business and productivity. Not all freelancers and individuals invoicing through personal service companies are pseudo-employees, but public authorities may simply be making blanket decisions as an administrative easement, although the HMRC report states that around 90% of decisions are made on a case by case basis. 

HMRC insists that 85% of the time the CEST tool gives a clear answer as to whether someone is employed or self-employed, and for the remaining 15% there is more detailed guidance and a helpline. HMRC also maintains that around 60% of the time a self-employed verdict is given based on data available from February 2018. 

However, the main complaint raised by professional advisers and other bodies is that the CEST tool does not take adequate account of or fully examine the principle of mutuality of obligation (MOO) because HMRC deems this present in every contract according to HMRC’s solicitors, who quote the Ready Mixed Concrete case (https://bit.ly/2uowxWw) in which they place a lot of faith. Despite this, HMRC has lost a number of IR35 cases in the courts and has been let down by the MOO point and other aspects of the CEST tool. 



The following important questions remain unanswered. 

  • Should the teething problems of the public-sector rollout be resolved first? These include: losses of contractors (in spite of HMRC’s view to the contrary); confusion re the mechanics of how it all works with engagers, agencies and umbrella companies etc; and application of the CEST tool. 
  • Is HMRC any better placed to police the new regime now than it was before? Otherwise, what is the point of implementing it?
  • Are employment agencies simply ignoring the rules in many instances and failing to apply PAYE?
  • How will financial services, the NHS, construction and oil and gas be affected by the new regulations if they are brought in? Is it all too close to Brexit?
  • Though IR35 is supposed to override the construction industry scheme in the public-sector regime, will this work in the private sector?
  •  Is this a breach of civil liberties by HMRC?
  • Shouldn’t the issues surrounding employment status be resolved first before we jump into something else; in particular, around worker status?
  • Are other employment status models around the world – for example, the Australian mode – better than CEST?

The debate on employment status rages on and, for employers, the waters seem to be getting muddier rather than clearer. All the representative bodies and institutes such as ICAS and CIPP will have submitted their responses to the latest consultation although it seems that moves on the operation of the IR35 legislation are being made before the wider debate on employment status has been resolved. Time will tell whether a sensible solution can be brought about.