HMRC finally published the much anticipated private sector IR35 consultation, our previous blog, Off-Payroll Working (IR35) in the Private Sector Consultation, covers the facts but there are a lot of questions remaining that I wanted to address.

I can't say that I'm surprised but the consultation doc doesn't make for pleasant reading for our industry, even if parts of it do read more like a fantasy novel. So, lets pick some holes in HMRC's extremely shaky argument.

The problem, according to HMRC

HMRC's reasoning for the public sector changes and carrying this over to the private sector are focused around the estimate that only 10% of PSC's that should be inside IR35 actually operate payroll in this way. According to the consultation doc, the cost of non-compliance in the private sector is projected to increase from £700m in 17/18 to £1.2bn in 22/23.

Now I have a lot of questions about where they plucked these numbers from, which are likely to never be answered. One key thing stood out to me here and that's the £1.2bn by 22/23.

At the event I attended on this with HMRC back in December, they also quoted this £1.2bn figure BUT they estimated the costs would reach £1.2bn by 24/25 - so, in the last 6 months they have shaved two whole years off this projection!? (I had to double check my facts here and found the slides from the HMRC presentation in Dec-17).

The second part of the problem HMRC focuses on is how hard it is for them to carry out enquiries in to worker's statuses, they bemoan the fact that it takes a long time and they don't have the resources - surely this is part of their role? Why does it fall to us to make it easier for them to carry out more enquiries in a speedier time frame!?

The "success" in the public sector

A large chunk of the consultation doc is dedicated to HMRC blowing their own trumpet about the "success" these changes have had in the public sector.

Apparently the fact that 58,000 extra individuals went on the payroll in the public sector is an indicator of success - well, I would argue that it could easily be an indicator that public sector bodies have incorrectly assessed the status of workers and forced workers on to payroll where they may have been outside the IR35 rules - particularly through the use of blanket decisions, something HMRC still refuse to accept has been a problem despite plenty of evidence to the contrary.

The value HMRC puts to its success is £410 million additional tax raised through income tax & NI since Apr-17 - this figure is very misleading. Yes, an increase in income tax and NI would happen if 58k more workers went on the payroll but what about the corresponding reduction in Corporation Tax now these workers are not making a profit in their Ltd Companies? HMRC do acknowledge this but do not put any £ value on this, this would hugely reduce the £410m headline figure they like to use!

There's more to add to that too. As we have only just finished the first whole tax year of these changes, it is actually impossible to calculate the financial impact - we won't know this until all the self-assessment tax returns are submitted in Jan-19!

Private Sector vs Public Sector

The consultation document highlights some areas where public sector bodies struggled to get to grips with the rules and the associated costs of implementing these, however they do then go on to say that these were overcome with the help of HMRC.

One thing that this consultation fails to tackle is the huge differences between public and private sector and the impact this would have on any implementation.

A major issue for me is how small and medium businesses who use contractors on a smaller scale will cope! Large blue-chips will have entire legal teams to help them but these changes are likely to discourage the use of contractors for smaller businesses. These same businesses are the ones crying out for flexible workers to boost their employee skills where they can't afford to take on workers under PAYE - this is the lifeblood of our economy and could seriously weaken any potential growth.

HMRC stress the support they gave public sector organisations to implement the changes, how do they plan on doing this across the whole of the private sector? They simply can't!

The private sector is a very different beast to the public sector and simply believing that you can implement these changes because they "worked" in the public sector is misguided.

The "options"

The consultation doc talks about three potential "options" but this is rubbish, only one would actually be considered by HMRC - that being the full roll out of the public sector rules. It does leave the door slightly ajar by asking for other options they may not have considered but the chances of HMRC taking any of these seriously is very slim.

Securing the labour supply chain would be hugely costly to implement, requiring large amounts of due diligence to be carried out on everyone in the supply chain. This would not be a quick process either and would seriously hinder businesses who need quick access to the flexible workforce.

Additional Record Keeping would be the easiest burden for clients to bear but realistically HMRC have no intention of bringing this in, by their own admission it doesn't really solve any of the challenges HMRC face. It'll just speed up the enquiry process a little.

You only have to look at the options they list as outside the scope of this consultation to see how strongly they favour a full public sector roll out. Some of these options could actually be useful if explored in more detail but HMRC refuse to consider them.

Then you have the impact of the Taylor Review, despite there being a clear crossover of topics covered, this consultation will be decided on and closed before any further consideration is given to the Taylor Review.

Timing

Any roll out of these rules really comes down to two potential dates, Apr-19 or Apr-20 and opinion amongst experts is pretty evenly split between the two.

The first point I would make is the timing of the consultation, when I spoke to HMRC in December last year they were confident they would publish the findings of the independent research and publish the consultation in the first or second week in Jan - it actually took them til late May...

The consultation closes on 10/08/18, at their quickest HMRC usually take 2-3 months to respond to a consultation taking us to November. The Autumn Statement takes place in November, which would be when they'd need to announce any changes for it to take effect from Apr-19 - so it is possible but extremely tight!

There are numerous references in the consultation doc to the fact that public sector bodies wanted more time to work out how to implement this (one of the few concessions HMRC make). HMRC also make a big point about the amount of help and support it provided public sector bodies to get this right, given the much larger scale of a private sector roll out are HMRC likely to rush it through so quickly?

That being said, it was pointed out to me that the dates relating to this consultation are very similar to the public sector consultation and would point towards Apr-19.

Personally, I think whilst nothing is impossible with this Government, Apr-20 looks a more realistic date.

Most Likely Outcome

Until now I had remained fairly positive that HMRC might back down, however now it is clear to me that HMRC are still completely single-minded and a full roll out of the public sector rules looks the only realistic option.

That doesn't mean we will give up! There are plenty in the industry working tirelessly to produce evidence and raise the profile of the biased interpretation of the research by HMRC and we will get actively involved in this.

HMRC have proven that they do not always get their own way when IR35 is concerned, just ask Jensal Software!