The trouble with HMRC's online tool for IR35
The proposal to change the way IR35 works in the public sector is deeply flawed. As argued previously on these pages, the plan will result in clients and agencies being forced to apply taxes unfairly; employment rights being denied to those paying employment taxes; and public sector organisations unable to access the skills they need to deliver vital public services. The Government’s answer to these and other criticisms is their online or ‘digital’ tool. Unfortunately we have grave concerns about this too.
As you will probably know by now, the essence of the Government’s plan is to make public sector organisations or the agency determine the IR35 status of engagements and then, if deemed within IR35, apply taxes as they would for their employees, through the Real Time Information (RTI) system.
The idea behind the tool is that it will provide a definitive determination of IR35 status. According to HMRC this will give surety to bodies looking to engage contractors and will effectively dictate the tax treatment of each engagement. If the tool says the engagement is inside IR35, employment taxes will be deducted at source; if the tool says it’s not within IR35, the contractor company will be paid gross and account for tax like a business, at year end – as it always has done.
Critics of this proposal (and there are many) argue that this plan won’t work because engagers will be risk averse, and they will be motivated to apply employment taxes to all engagements, for fear of being liable should they make the wrong status determination. HMRC then argue that the tool will help them to make the right decision and remove the risk of getting it wrong.
Then when critics say that engagers will not understand whether IR35 should apply, as the rules are so complex, HMRC argue that they don’t need to understand the rules, and that the tool will help make the right determination.
So the tool is key to the Government’s argument. If the tool doesn’t work, or if engagers don’t want to use it because it’s difficult and burdensome, criticisms of the proposal will stand.
We are concerned the tool won’t stand. Essentially it comes down to the fact the rules around status, and IR35, are complex and open to interpretation. Applying them to real life engagements can only be done subjectively. Generic tools are incapable of generating an accurate determination.
There is also the question of who will complete the tool. IPSE presumes the tool will be completed by the engager with the responsibility to decide whether IR35 should apply. In some cases this will be an agency but they will not have the necessary detailed understanding of the working practices of the engagement to enter the relevant information, as they will not observe the day-to-day interactions between the client and the service provider.
The agency will therefore be reliant on information passed to it by the client or service provider. What happens when this information conflicts? What happens when no information is forthcoming? When happens when the working arrangements change over time? What happens when the information is vague or unclear? The answer to all of these questions is that the agency will ignore the tool and apply the new rules, regardless of the actual status of the engagement, in order to avoid liability.
IPSE has had several meetings with HMRC about this proposal and about the tool and we have been left with the impression that they are struggling to make it reliable. We are engaging constructively with them and have agreed to help test it, but we have seen nothing so far to make us think it will work, and the clock is ticking.
The proposal is due to be implemented in April 2017, and the tool needs to be ready by then. If however, it provides incorrect or unfair determinations, we believe it is likely to be challenged at tribunal. It would be hugely embarrassing for the Government if the judge were to disagree with tool’s assessment.
If you are concerned about this proposal, and we think you should be, then help us to fight it by writing to your MP and booking an appointment to see them. You can also have your say on the proposal and ask questions during our twitter chat between 13:00 and 14:00 on Tuesday 11 October – please do join us. We’re also planning to do a webinar on this issue on 1 November – more details here.
Tax, Research, Policy