Determining IR35 status based on archaic case law

The complexity of accurately determining someone’s IR35 status can leave a “big grey area” for businesses, according to Seb Maley, CEO of Qdos.

In a collaboration between HMRC and IFF Research, a report was published in December 2022, showing how IR35 reforms have impacted contractors. The report was based on the views of 353 businesses, and HMRC reported that the IR35 reform generated an additional £1.8bn in tax revenue between October 2019 and March 2022.

Maley says the report “glossed” over many of the issues that both contractors and business have faced recently.

However, Maley believes businesses have become more engaged with IR35 and the way they approach the rules.

“Businesses have tried to do things properly, and they’ve recognised the fact that contractors are an important part of their ecosystem, but in doing so, it’s created a huge administrative burden, not to mention the sort of financial risks that are associated with it,” Maley notes.

Colin Ben-Nathan, a director at KPMG UK, specialising in financial services and tax, believes the IR35 administration burden can make businesses overcautious and this can be counterproductive because it can deter contractors from working with them.

Maley feels the issue of determining an individual’s working status is based on “archaic case law” that does not reflect the modern way of working. These complexities make it difficult to determine a status, creating financial risks and pushing a business to be more risk-averse.

Ben-Nathan echoes this view and states that while there are clear cut, black and white cases, there are always cases in the grey area.

“We don’t have a scientific formula as to what constitutes employment for tax purposes, so, it’s sort of an art rather than a science,” admits Ben-Nathan.

“Some way or shape to codify what we actually mean by employment for tax purposes is required because if you can’t explain it, it’s not surprising we run into difficulties” says Ben-Nathan.

IR35’s “Structural flaw”   

A recent survey conducted by Qdos, found that despite inflation reaching a 41-year high recently, the IR35 legislation remains contractors’ biggest concern for the year ahead.

According to Dave Chaplin, CEO at IR35 Shield, the reason contractors are so concerned about IR35 stems from the flaw in legislation called the “offset issue”.

“The legislation has a massive flaw where we end up with double taxation and this was highlighted by a National Audit Office report, and it was also picked up by the Public Accounts Committee (PAC) in February 2022,” notes Chaplin.

Following this, the PAC reported it in May and labelled it a “structural flaw.” HMRC has said it will investigate the issue, but Chaplin in his opinion believes that the department has known about it for five years, and it is yet to be rectified.

“What this means is essentially, the tax risk to a hiring firm, if they get the determination wrong, is four times more than it should actually be.”

Chaplin says this issue has to be solved and in May 2022 the PAC said they were planning to resolve it.

Spring Budget and IR35

The IR35 off-payroll legislation has endured a turbulent time recently after it was revealed it would be repealed in the September statement, but only a month later the decision was reversed by the newly appointed chancellor, Jeremy Hunt.

“That was just an unnecessary rollercoaster for many firms,” says Chaplin.

The 2023 Spring Budget will be published in March, and Maley doubts IR35 will feature in the statement.

“IR35 was the second highest forecasted tax yield behind corporation tax, so they are certainly pinning a lot fiscally on it, even though I am not sure I agree with the figures, but they do see it as a tax generator.”

Ben-Nathan echoes this view and states he would be surprised if the government made any “radical” changes to the legislation.

The government must decide what its priorities are for the future, with the issues around inflation, energy prices, Ukraine, and the upcoming general election, adds Ben-Nathan.

With the additional £1.8bn in tax revenue, according to HMRC’s latest report, Ben-Nathan feels that the government would be unlikely to “sacrifice” this tax generator because of the apparent “tax leakage” that occurred before its inception.

Chaplin says the best the government could do is fix the offset issue, but the hopes of IR35 being repealed are a “pipe dream”.

Concerning the offset issue, Chaplin says “we’ve been waiting a long time for this and whether they will do it, I don’t know.”

The Chancellor, Jeremy Hunt, will make the Spring Budget announcement on March 15.