Orange Genie Examines the Government's Response to IR35 Petition

If you’ve been working as a contractor in the UK over the last year, it will be no surprise that a petition to prevent the extension of IR35 reform into the Private sector received over 14,000 signatures, or that the government has responded.

On first reading, their response appears to be balanced and reasonable, but closer examination reveals it to be less so. If we take HMRC’s points one at a time.

  1. “It is fair that two individuals doing the same job in the same way pay broadly the same tax and National Insurance.”

We see government using this argument a lot, but saying something over and over again doesn’t make it true. They fail to recognise the risks and investment Contractors take when moving into freelance working. They invest their own money in equipment, training and professional development, they are not eligible for government funding, they give up the protection of employment rights and the benefit of employer’s pension contributions. They assume risks in the name of autonomy and ambition. Surely those costs and risks should be recognised, and that ambition encouraged?

Another aspect of this is that HMRC seem to assume that every contractor is simply making up the numbers in an organisation, doing the same role as someone else. This is not correct and it's therefore unfair to make a blanket statement like they do. Very often, contractors are engaged for specific skills that an organisation does not already have, so there is not an employee doing the same job as them in the first place.

  1. “IR35 is not effective enough. To improve compliance, the Government introduced reforms”

This statement angers us more than most. Over the years many stakeholders, including Orange Genie, FCSA, REC and ASPSCo have called for existing legislation to be properly and effectively enforced, rather than reformed. So often there is nothing wrong with the original legislation but a lack of enforcement allowing rogues to exist and thrive. This is another example of those calls being ignored. It is frustrating that Government is apparently willing to invest in disruptive legislative change, but not in the enforcement of existing law.

Legislation without effective enforcement is meaningless. Where we can reasonably expect reforms to improve compliance we will support them, but we see no evidence that extending the reform of IR35 will do so.

Recent years have shown a pattern of Government reacting to a lack of effective enforcement by reforming legislation, which they then also fail to enforce.

  1. “The public-sector body is responsible for determining whether or not the rules apply”

The Government’s response appears to assume that this is being done competently, correctly and fairly. However, we’re seeing two patterns that suggest this is not the case.

On the one hand, we’ve seen risk-averse bodies making blanket “inside” decisions due to the workload associated with individual assessments and the potential consequences of deciding “outside”.

On the other, we’ve seen “inside” decisions being reversed due to cost, since the hirer may have to pay 25-30% more when the worker is inside IR35.

In light of these patterns we have little confidence that handing enforcement over to public sector bodies has been effective or fair, and we see no reason to expect private sector companies to do any better, assuming they even know about the proposed legislation.

  1. “Genuinely self-employed individuals continue to be unaffected”

Yes, and the innocent have nothing to fear … but seriously, anyone watching the chaos that’s unfolded since April 2017 knows this isn’t the case. We suspect that the Government meant to say that the legislation is not intended to affect genuinely self-employed individuals, and that they would not be affected if the legislation was followed and enforced correctly.

  1. “Initial evidence suggests that it has been successful in improving compliance”

As often happens in the period following disruptive changes of this kind, there has been an enormous increase in avoidance and evasion. Many contractors, made vulnerable by anxiety about their falling incomes, have turned to disguised remuneration schemes and offshore models. This is one area in which HMRC are increasing enforcement activity, so they are clearly aware of the issue. Unfortunately their lack of resource means activity is slow, allowing rogues to continue to trade until they phoenix into their next scheme.

We have seen an unprecedented 400% growth in so-called umbrella companies and accountants offering both aggressive tax avoidance and tax evasion schemes since the public sector reforms went live. Hardly a success.    

  1. “More people working through their own company are paying the right tax”

More people are paying more tax, but that isn’t the same thing as paying the right tax. The CEST test, which has been forced on the public sector, has always been flawed and widely criticised as unfit for purpose. It ignores some case law in favour of HMRC’s interpretation of the IR35 rules, and has almost certainly resulted in genuinely self-employed contractors paying more tax and National Insurance than they should.

  1. “The cost of non-compliance in the private sector is still growing and will cost taxpayers £1.2 billion a year by 2022/23”

The Government have proved reluctant to explain where this figure came from, which leads to obvious concerns about its accuracy.  

Even if we accept the figures, reform of IR35 is not necessarily the best solution and we would once again call for existing legislation to be enforced before reform is considered.

If you have questions about this issue or if Orange Genie can help in any way, please contact our expert team on 01296 468483 or email info@orangegenie.com.

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