What is the IR35 Forum and why was it set up?
According to HMRC’s website, the following are the IR35 Forum terms of reference.
Terms of reference
To advise on the administration of IR35 policy in practice, assisting HMRC by acting as a consultative body to:
- provide HMRC with insights on the effectiveness of administration of IR35 on the ground
- identify and discuss specific areas for improvement in the administration of IR35
- explore the implications of potential changes to policies, products and processes relating to IR35
- help HMRC to communicate key messages to the members of organisations represented on the forum and a wider audience about IR35, and to ensure that guidance and information is clear and accessible for customers
Membership of the IR35 Forum
So, who are on the IR35 Forum giving advice to HMRC?
It is a mixture of contractor, accountancy, recruiting representative bodies as well as industry experts like the Institute of Directors.
According to HMRC “Meetings should be constructive, open and professional.”
History of IR35 Legislation
IR35 was first brought in by Tony Blair’s Labour Government in 1999.
There was a legal ‘scam’ which was exposed by The Times newspaper.
Companies were laying off employees on the Friday and re-hiring them as contractors on the Monday.
These ‘contractors’ did the same job at the same desk for the same department of the company.
There were tax advantages for bot the companies and the new contractors.
Contractors or Disguised Employees
The Government called these ‘disguised employees’ and brought in IR35 to stop the practice.
However, the IR35 net caught more than those ‘disguised employees’.
Many genuine contractors, who operated for years via a limited company, were caught in its net.
A Labour Government Minister at the time admitted that it caught more contractors than they intended to.
However, that didn’t mean that they would change it.
Conservative Party and IR35
In 2010, the Conservative party, prior to the election that year, led contractors representatives, the Professional Contractors Group (now IPSE), to believe that they would abolish IR35.
They said it was ‘unfair to IT freelance workers’.
Indeed the PCG rushed out a press release just before the election on that basis.
However, the only hard promise they made in their manifesto was to ‘look at ‘ IR35 again.
They duly ‘looked at’ IR35 again and decided to keep it.
Conservative Party Infidelity
Not only that, Chancellor Osborne said he was going to STRENGTHEN IR35.
Indeed, although laying off HMRC staff elsewhere, he hired an extra 36 IR35 workers based in Stockport, Croydon and Edinburgh.
Since then there has been further strengthening of IR35.
The Conservative Government took away umbrella company contractors rights to claim Travel and Subsistence against tax.
IR35 in the Public Sector
In 2017, they changed the rules in the public sector where they are the employer.
Traditionally contractors and freelancers decided their own IR35 status.
If they got it wrong they would potentially come under investigation.
However, there was safety in numbers.
Freelancers were more likely to be struck by lightning than come under investigation for IR35.
Even where contractors came under investigation for IR35, if they have IR35 insurance and are represented, they win far more cases than HMRC do.
Fee Payer Now Decides Contractors IR35 Status
However, the Government changed all this.
They changed the rules so that it is the ‘fee payer’, i.e. the department or trust hiring the contractors, who decides the IR35 status of contractors.
The ‘fee payer’ will also incur penalties if they get it wrong.
As you can imagine they don’t want to take chances.
So, many departments decided that they would no longer hire freelancers using limited companies.
Freelancers Forced Into Umbrella Companies
This drove many public sector contractors into umbrella companies.
Contractors group IPSE claim that this cost contractors an average of £14,000 a year.
To help those fee payers to decide, HMRC introduced a new IR35 test.
Check Employment Status for Tax
It’s called the Check Employment Status for Tax test.
However, this was heavily skewed towards HMRC.
Many contractors who are legally outside IR35 failed the test.
Indeed, one accountancy company fed the details of contractors who have won IR35 cases against HMRC through the CEST test.
Many of then failed the test.
CEST Test Has No Legal Status
However, despite this test having no legal status, many public sector departments made contractors take the test and took the results as conclusive.
Out of 750,000 contractors who have taken the test so far, 54% passed the test, 41% failed and 15% were indeterminable.
As public sector departments are highly unlikely to allow the indeterminable contractors to operate via a limited company, effectively it meant that just over half of contractors could continue to operate through a limited company.
The other half would have to dump their limited companies and operate via limited companies.
Blanket Ban on Limited Company Contractors
Some departments, took no chances and went even further. They made all their contractors dump their limited companies.
Some locums and IT contractors reported that they lost 30% of their income through switching from a limited company to a PAYE umbrella company.
Despite the problems this caused with many contractors and locums dumping the public sector causing many problems with IT systems and a shortage of doctors, the Government and HMRC decided that they would like to roll this out to the private sector too.
IR35 Changes in Private Sector
There was a leak to The Times newspaper just before the 2018 Budget saying that the Chancellor was going to roll out the IR35 public sector changes to the private sector too.
However, there was enough of a hue and cry about this amongst contractors, recruiters and accountants, with a petition raised that the Government decided that there would be a consultation period first prior to any implementation.
IR35 Forum Consultation
This went to the IR35 Forum.
The consultation period is now over.
The results will be announced in November’s budget.
It now seems certain that these rules will now be implemented in the private sector too.
The most that private sector contractors can hope for is a delay in its implementation till April 2010.
However, it is more likely that the Government will announce it in November’s Budget and will implement it in April 2019.
This will be the biggest ever shake up in the contractor / freelancer industry.
Its impact will be even greater than the original IR35 and will catch far more contractors in its net.
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