HMRC have published their analysis of their commissioned research into the impact of IR35 reforms on businesses, and their conclusions have, predictably, been almost unanimously criticised by commentators in the contracting industry. In this article we’ll take a look at those conclusions, and examine how they match up with our experience, and those of our clients and partners.
What are the conclusions of the report?
You can read the report for yourself here, but here are the headlines:
130,000 workers are believed to be affected by the 2021 reform
There has been an increase in overall tax paid by contractors working through a PSC
Around half of establishment level organisations found it “quite easy” or “very easy” to comply with the reform, while around a quarter found it “difficult”.
A third of group level and establishment level organisations spent £0 on monthly operating costs and a quarter of firms spent £999 or less.
“The Majority” of organisations used the Government’s own CEST tool, and “nearly all” reported it as useful – along with other HMRC resources.
This supports the familiar narrative from HMRC that the reform’s goals have been achieved and minimal disruption has been caused. This does not match the experience of many in the contracting industry, including Orange Genie and our clients and partners.
How easy was IR35 reform for end clients to implement?
Our experience was that almost every end client we spoke to needed a lot of help and advice to comply with the reform, and this is not surprising given the complexity of IR35 itself and the fact that many end clients had not needed to deal with it in the past. This obviously doesn’t match up with HMRC’s data.
It’s worth considering the report’s findings in the context of the current situation in the Public Sector, where similar IR35 reforms were implemented in 2017. Several high-profile public-sector bodies, including key government departments, have recently received enormous tax bills because HMRC believes they assessed IR35 status incorrectly.
If asked in 2018, these bodies may have said they found it easy to comply with the reform, and we may well see this pattern repeated in the Private Sector, with those currently reporting that they found it easy experiencing more difficulties in due course.
How much is IR35 reform costing end clients?
The report’s finding that a third of end clients are spending nothing on ongoing IR35 compliance is worrying, and it suggests that we may see non-compliance being uncovered in the future. IR35 compliance requires the implementation of new processes and policies, which need to be administered and reviewed by experts on an ongoing basis – all of which would create a cost.
In our experience, end clients who understand the importance of IR35 compliance have invested in implementation, though the actual costs vary depending on the size and nature of their contractor workforce. We are very surprised that the report indicates such low costs, and we believe in reality the costs are higher in most cases.
How useful were the resources HMRC provided?
The report cites the availability of CEST (Check Employment Status for Tax) as an important reason why businesses didn’t struggle with implementing IR35 reform, and this claim will have been met with surprise and concern from many industry commentators.
CEST has been consistently criticised since its launch in 2017, and this criticism has continued through several alleged improvements. The main issue is that it ignores some case law and often returns incorrect results. For example, almost all the public-sector bodies we mentioned earlier had relied on CEST to complete IR35 assessments that were later found to be incorrect.
HMRC also claims to have delivered “extensive programme of education and support to help customers to implement the rules and an overwhelming majority of organisations found our support helpful”.
Our experience is that the vast majority of end clients need expert help to identify and implement the necessary changes and to comply with the new rules on an ongoing basis, and they haven’t been able to rely on resources provided by HMRC alone.
If you have questions or if we can help in any way, please call our expert team on 01296 489483 or email info@orangegenie.com.