Government offers "flimsy" response to PAC IR35 report

While much of the country was on holiday the government published its response to the Public Accounts Committee’s (PAC) report ‘Lessons from Implementing IR35 Reforms’. IPSE welcomed the PAC report when it was published in May, hoping it might ‘jolt the government into action’. The government’s rather flimsy response to the report, however, highlights just how unwilling it is to address the very real difficulties these rules pose to clients, agencies and contractors.

Central to the deep-seated unfairness of the new IR35 rules is that end-clients have to make status decisions that will have a dramatic impact on the contractors they work with. If the client decides – rightly or wrongly – that IR35 applies, the contractor must convert themselves from an independent consultant to a quasi-employee, often via an umbrella company. In the vast majority of cases that we at IPSE are aware of, the contractor doesn’t want to do this – they are forced to. What makes the pill all the more difficult to swallow is that the contractor, in many cases, will vehemently disagree with the IR35 decision and yet they are left (almost) completely powerless to do anything about it.

This was an issue the PAC astutely picked up on in its report. Indeed, it made a recommendation that ‘HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations.’

Miraculously, HMRC agreed with the recommendation – wonderful!

Perhaps we will get what IPSE called for back when the legislation was being consulted on – an independent arbitration service to issue binding opinions on cases where the parties could not agree. Alas, no.

After agreeing with the recommendation, HMRC go on to defend the overall reforms and even defend the woefully impractical appeal mechanisms already in place:

‘The best result for workers, engagers and the Exchequer is where employment status is treated correctly from the start. The government remains confident that the reforms to the off-payroll working rules were the best way to achieve this.’

Eh? How do you know? HMRC has no idea whether most clients are getting status decisions right, and it knows for certain that some in the public sector (Department of Justice, the Home Office, DWP and DEFRA) are getting it wrong – or at least it thinks it does. There is no evidence at all that clients are making accurate determinations, which is why it is so important that contractors have a meaningful route to challenge them.

According to their response, government thinks this route already exists, which is why agreeing with the recommendation to ensure ‘a fast and independent process for contractors to resolve disputes’ isn’t difficult to do:

‘The legislation creates an additional right for workers to challenge their employment status for tax determination with their client … If a worker still disputes the determination, they can file their Self-Assessment return reflecting their own assessment. Where HMRC disagrees with a customer’s Self-Assessment, all customers have the right to have the decision reviewed, and to appeal to an independent tribunal.’

The right to challenge the client’s determination simply throws the issue back to the client. The client is not compelled to consider any additional evidence or consult an independent expert. Despite this, IPSE thoroughly recommends that contractors who disagree with the client decision do challenge it. According to our research these challenges are successful around 17 per cent of the time, so it’s worth a go, but the fact remains that any client that chooses to stubbornly stick to its initial, wrong decision is free do to so, no matter what the evidence suggests.

Challenging the status through the tax return is a complex process, but it has been successfully done by one IPSE member who shared their experience here. The trouble is it requires so much professional advice, the costs will outweigh the benefits in most cases (our member was lucky – their wife was a leading employment law specialist). It is also the case that the lion’s share of the additional tax burden imposed by the incorrect determination is Employers National Insurance, which the contractor cannot claim back despite having paid it indirectly. As for going to a tribunal – well now the costs are becoming stratospheric – it’s completely unaffordable.

So, despite ‘agreeing’ with the recommendation, HMRC it seems have no intention of doing anything about it – apart, that is, from defending the impractical processes already in place. If taxpayers are to have any faith in the rules which govern how they pay tax, this needs to change. Leaving people powerless to challenge a decision they know to be wrong is completely unacceptable – and we will be making this point to the new prime Minister’s review of IR35, when it happens.

The PAC report and the government response follow on from a Committee evidence session in which MPs quizzed HMRC officials on IR35 back in February. A video recording of that session is still available and is well worth a watch. It highlights just how problematic the IR35 rules have been since the reforms came in. The government response to the PAC can be seen here, but I cannot recommend it – it offers no comfort to those affected by this deeply flawed legislation.