Dave Chaplin reflects on the upcoming IR35 changes.
From April 6th 2017, HMRC is pressing ahead at full speed to introduce some new changes into the public sector, whereby clients will have to check whether their contractors pass IR35 or not.
Most hirers will not have the expertise to understand whether IR35 applies and the net result will see a public sector talent drain, a reduction in the quality of public service delivery and higher costs for the taxpayer. It’s a lose-lose situation for all parties.
To date, 21 IR35 cases have gone to court, on top of the hundreds of employment tribunals that have established the case law over decades. Some cases aren’t as important as others. Some results have surprised experts. What is clear is that without expert knowledge it is near on impossible to evaluate a contract as a layman. So, who in the public sector will be responsible for assessing these 20,000+ contractors when these new rules kick in?
HMRC claims that its yet-to-be-released online tool will give a clear Yes/No answer in 95% of cases - which is incredibly ambitious. Building a simple tool can’t be done. The finest legal minds haven’t been able to boil down decades of employment case law into an IR35 questionnaire that provides a binary result. How HMRC is going to achieve it is anybody’s guess. Expert sources who have seen the current beta are telling us that the bar has been set artificially high and that 90% of all contractors would fail the HMRC test, despite what the legal reality actually is.
Shortly after the introduction of IR35, we developed our own free online IR35 test in conjunction with tax experts. It took a full year to develop and has been repeatedly refined.
The outcome from this subjective test can only give an answer on a spectrum with no definitive result. Of the 95,000 contractors who have taken the test to date, 40% are borderline. In other words, computer says ‘don’t know - you need to speak to an expert’. That’s the problem. Employment status lies on a spectrum, and there are clear passes and fails – but the borderline cases require human assessment.
Our concern is HMRC will err on the side of caution and those who are hovering between pass and fail will automatically be deemed “not passed”. You’ll then have contractors who are outside IR35, whose advisors tell them they are outside IR35, battling public sector departments who have been strongly encouraged to use a tool which wrongly informs them the contractor should be caught. It’s a total mess.
We could see a scenario whereby many disgruntled contractors judged to be inside IR35 attempt to claim statutory employment rights at an Employment Tribunal (EAT).
Suppose a contractor has been operating outside of IR35 for over a year with the same public sector client who now says they must be inside IR35. If the contractor agrees, they are exposing themselves to considerable IR35 for their historic work and a position they may have no option but to protect.
Ironically, if the contractor puts up a weak defence at an employment tribunal to prove they are an employee and loses, they then get the result they really preferred anyway. They will have protected the historic position, but are unlikely to have a client anymore. We could be looking at thousands of Employment Appeal Tribunals come April as contractors work hard to prove their status.
These reforms have been ill-thought through and will lead to an exodus in talent significantly impacting already stretched public sector services. The UK labour market needs the flexibility and expertise provided by contractors. The point of hiring contractors via personal service companies (PSCs) is to hire short-term expertise on tap. Economic growth will only be stimulated by allowing contractors the freedom to contract without fear and clients the freedom to source expertise when they need it without the spectre of employment tribunals. Brace yourself – 2017 is going to be anything but smooth.
Chaplin is the author of Beat IR35: The ultimate guide to IR35 for contractors, agencies and clients available at https://www.amazon.co.uk/dp/1520317492 . The book provides readers with all the expert knowledge they need to stay compliant, reduce tax risk, avoid punitive IR35 taxes, and successfully combat any HMRC investigation.