IR35 and the Inequality of outcome
1. House of Lords Report (released 27 April 2020)
It appears to me that the situation (identifying issues) as put forward in the Lords Report was about an unfair and unjust IR35 regime which has been pushed through by the Government through HMT/HMRC. I rely on the rudimentary ABCs to summarise the Report:
- A) Coerced commercial businesses enforcing a regime which even the UK Tax Authorities struggled with, so they passed the buck;
- B) Has not anticipated the behavioural consequences, or rather it dismisses that inside IR35 blanketing was the consequence; and,
- C) Officials foresee no impact on the labour market from the IR35 reforms because HMT/HMRC rely on misguided evidence based on the Public Sector reforms. Even zero rights employment is mentioned (I will come onto this point later).
2. IR35 and safe pair of hands
On mature reflection, and to pause for a moment here, this is in consideration that my informed opinion is based on over 20 years of experience, successful defence at tribunal appeal proceedings, my many publications on other tribunal decisions, and general experience in dealing with 100s of status issues.
3. Pronounced timing of Jesse Norman's statement to Parliament
On the same day as the House of Lords Report, Jesse Norman pronounced to Parliament that the Private Sector Off Payroll reforms will go ahead in April 2021.
When questioned by Roger Gale MP:
- Question: To ask the Chancellor of the Exchequer, what recent assessment he has made of the effect of IR35 tax reforms on the economy and flexibility in the workforce?
Jesse Norman’s response , included:
- Response: “Independent research on the impacts of the reform in the public sector has suggested that it did not reduce market flexibility or affect the use of contingent labour."
He regurgitated the same anecdotal response we have all witnessed before and deeply criticised. We have also repeatedly listened to the like for like comparison regarding tax but disregarding zero rights. Some granular independent research is required.
To paraphrase, the Off Payroll reforms constitute inequality of outcomes, such as: -
- I. Complexity dovetailed with uncertainty regarding interpretation of case law and all-circumstances as required by the “IR35” legislation.
- II. Lacking an independent and robust status dispute process.
- III. Contractors plug the skills gap, paid premium rates for doing so and in exchange sacrifice employment rights.
It is not a like for like comparison.
4. A doctrine of unfairness and injustice – the Off Payroll Reforms
Standing back, singularly the most disturbing fact is those employers/end clients who are blanketing IR35 reforms or have in the past been responsible for pushing individuals into intermediaries to save on employers NICs (and avoidance of employment rights and statutory sick pay and holiday pay etc) have not been “sanctioned” as the contractor carries the burden.
Consequently, the future of Status Decision Statements (SDS) has led to blanketing because it is too complicated and less tax risky.
It should come as no surprise to anyone that some people are much better at doing a given task, no matter what it is, than others and, because of that, it is in everyone’s selfish commercial interest, in the narrowest sense, to allow such talent to deliver contracts for business services to plug the skills gap so that we can all benefit. However, the terms they operate under mean that those micro-businesses have the perennial problem of business development and generation of further work – just at a time when their contract is concluding.
Of course, this is still in a highly regulated working environment and those regulations apply equally to employers, clients, employees and the self-employed.
However, the contractual frameworks they operate under are there for security and to protect the clients who pay premium rates to engage skills that may only be temporarily required, pro-rata payments, and termination without retention (to use and abuse the skills and experience - see my RALC v HMRC defence submissions).
Now, that also happens to be good for each party, but an equally powerful case can be made that it is true that it benefits the public and private sector economies. This means that no person should ever be denied an opportunity for progress through a personal services company in a productive direction. Otherwise there would be no sole traders, which is quite frankly ridiculous.
5. A brief recap on the Classic employment status test of Sufficiency
So, personal service is a negative condition of employment, but genuine Substitution is determinative of self-employment in an IR35 sense.
Further, the classic Ready Mix Concrete case informs us that for an employment status ruling there needs to be a sufficient framework of Control and sufficient stronger Mutually of Obligations than contract MoO (contract MoO tells us nothing about the nature of the engagement – sufficiency).
But, of course the third limb of RMC is to test whether any other factors sufficiently oppose employment status, such as being on business on your own account, exposure to financial risk etc.
Given that genuine Personal Service Companies take the risk and back themselves, then why not reward the participating director by distributing hard earned profits by way of a dividend? The doctrine of reaping a dividend from distributed profits (or retained profits) is not new. What is fair about public sector workers being paid when they do not turn up for work if they are unable, or not being furloughed, and people in business having to solve many complicated problems to cover costs without a comfort blanket? Try arguing that one with me and I will give you short shrift. It is not a like for like comparison, is it?
To put it another way, that movement forward towards production of individuals delivering services without employment utility should never be interfered with by arbitrary prejudice such as deeming employment through IR35 and its many reforms (or rather sticking plasters on the open wounds of bad tax legislation).
However, end clients should not be complacent. Given Jesses Norman’s pronouncement in Parliament on the day the House of Lords released their highly critical Report on the Off Payroll Reforms, then reasonable care is not just about using a CEST tool that fails to cover MoO and fails to consider all the relevant circumstances, or blanketing by issuing inside IR35 SDSs.
I am here to offer my support, interested?
Chris Leslie
Director of Tax Networks Limited
28th April 2020
