IR35: umbrellas are feeding HMRC’s £3.6bn tax grab

IR35 expert, Qdos, has responded to the release of HMRC’s evidence put forward to the Finance Bill Sub Committee for their inquiry into IR35 reform in the private sector. Will the HMRC admit what the reform is really doing to British entrepreneurship and self-employment?

“HMRC’s submission doesn’t tell the full story of IR35 reform,” says IR35 insurance specialist Qdos CEO, Seb Maley.

According to Maley, the government “paints a picture that suits its own narrative and interests” rather than addressing the realities faced by contractors and businesses.

“The tax office says it’s too early to assess the impact of the changes and if reform has made it more difficult for firms to engage contractors. It’s not too early. While more firms are getting to grips with reform, the fact of the matter is that it’s created challenges and resulted in contractors being forced onto the payroll,” says Maley.

Little incentive for HMRC to pull the plug on umbrella companies

Maley notes that the government expects to raise £3.8bn by 2026 through IR35 reform. But are these assumptions based on contractors being fairly or unfairly placed inside IR35?

Maley says that for HMRC to assume that IR35 reform has impacted only 180,000 contractors seems way off the mark, particularly when the government has previously said 500,000 people work through umbrella companies – a way of working inextricably linked to contracting and IR35.

“HMRC still somehow claims that CEST is capable and aligned with case law. Again, it isn’t. The tool hasn’t been able to determine a contractor’s IR35 status well over 200,000 times in the past year or so. What’s more, and despite this evidence, making light of it, HMRC has no obligation to stand by an IR35 decision based on CEST,” says Maley.

Qdos research completed by over 1200 contractors shows:

• IR35 reform (62%) is seen as the biggest threat to contracting in 2022, above new tax changes in April (18%), Covid-19 and Brexit (both 6%).
• Most contractors also feel that IR35 will continue to impact them in 2022, with (51%) not of the view that the situation will improve. 
• On average, contractors rate CEST (HMRC’s IR35 tool) as 2/10, with just 14% happy to work with a business that uses the tool.

Will blanket bans on contractors be lifted?

In a previous Freelance Informer report, blanket bans on PSC contractors exposes UK to risks – Freelance Informer, Dave Chaplin, CEO of ContractorCalculator and compliance solution IR35 Shield, had this to say, “Specialist professional freelancers who are genuinely self-employed are hired to provide their services on a project-by-project basis, so it shouldn’t be any more difficult for government agencies and departments to hire them in a crisis.”

Chaplin continued:

The problem arises when hirers opt to blanket ban limited company contractors as we have seen happen since the Off-payroll legislation came into effect.

Blanket bans mean that hirers have fewer options when it comes to hiring the best talent as that talent has now sought work elsewhere, although we know that some Government departments have started to lift blanket bans as we saw earlier this year at Network Rail. 

HMRC’s Revenue and Customs Digital Technology Services (RCDTS), for example, has denied that it has hiring policies that unfairly favour limited company or personal service company contractors within the department or its technology arm, according to a Computer Weekly report.

HMRC’s accounts between the 12 months to 31 March 2021, showed that it engaged 403 temporary workers, which was even higher than the previous year, of whom 15 were determined to be working inside IR35. The remaining 388 individuals were classified as “out of scope” of IR35.

HMRC confirmed to Computer Weekly that the vast majority of the individuals classified as being out of scope of the off-payroll rules were employed via umbrella companies during this period.