HMRC IR35 Defining Battle
Contractors can sit and wait for a HMRC IR35 defining battle with the big accountancy firms and consultancies. This will take place some time after the IR35 reforms are implemented in the private sector in April 2020.
Why do I believe this to be true? The reason is that, although some companies will use HMRC’s deficient IR35 test, Check Employment Status for Tax (CEST), many companies are not going to do so. Indeed many companies are using instead IR35 status tests created by the big consultancies and major accounting firms. This is where the clash will come.
Contractors Questions on HMRC IR35 Defining Battle
- Why are companies using Consultancy Firms IR35 Tests Rather than HMRC’s Test
- What Action Will HMRC take against companies misapplying the IR35 reforms?
- When will the HMRC IR35 defining battle take place?
- Have HMRC Fined Public Sector Bodies over Misapplying IR35?
- Which Public Body are HMRC currently pursuing?
- What Percentage of IR35 Cases Against Contractors Do HMRC lose?
- What kind of foe will the Government be up against?
Why Are Companies Using Consultancy Firms IR35 Tests Rather Than HMRC’s Test
These tests are believed to be a far more accurate reflection of a contractor’s IR35 status than HMRC’s test.
However, HMRC don’t believe that. So, there will be very many contractors at very many companies who have passed an IR35 test by one of the big accountancy firms whom HMRC will believe to be inside IR35.
HMRC will already have included these contractors in their figures when they calculated that they would bring in £3 billion in 4 years from implementing the IR35 reforms in the private sector. That’s £750 million a year. They don’t want to go back to the Government in a year’s time and say “we were wrong. The tax we got was a lot less than that.”
What Action Will HMRC Take Against Companies Misapplying IR35 Reforms
So, as HMRC believe many of those contractors who pass the big accountancy firms’ IR35 tests would be inside IR35 if they were made to sit HMRC’s IR35 test, they will be forced to take action against the companies who they believe to be misapplying the IR35 reforms.
After all Conservative Government Treasury Minister, Jesse Norman, when asked an IR35 question in Parliament said that “there is only 10% compliance in this area”.
A few weeks later HMRC said exactly the same. So, the Government and HMRC believe that 10 times the number of contractors who are currently paying PAYE should be paying PAYE under IR35.
This will be included in their calculations of the money they expect to get from the IR35 reforms. So, they will be going after firms where they believe the IR35 changes are being misapplied.
When Will the HMRC IR35 Defining Battle Take Place
Then the mother of all tax battles will erupt.
The companies who use IR35 tests created by the big consultancies will want some guarantees that they are correct and that the company are protected.
This is sure to be guaranteed via some sort of IR35 insurance. The consultancy will either guarantee the company against loss to HMRC or they will at least guarantee that they will defend them in any HMRC IR35 case.
When contractors buy IR35 insurance it is usually the latter.
Have HMRC Fined Public Bodies Over Misapplying IR35
HMRC have already shown that they will aggressively pursue organizations that they believe are misapplying the IR35 reforms. Indeed they have fined the NHS £4.3 million for misapplying those IR35 reforms. The Government implemented the IR35 reforms in the public sector in April 2020.
Remember that HMRC only guarantee their own IR35 test. They promise that if a firm’s contractors sit the test and pass it HMRC won’t come after them in he future for back tax, interest and penalties That’s even if later the contractor is found to be inside IR35.
However, HMRC don’t guarantee the tests created by the big consultancies. But the big consultancies WILL guarantee them to their client companies.
So, let battle commence.
Which Public Body Are HMRC Currently Pursuing
HMRC are now examining Transport for London (Tfl) for misapplying the IR35 changes.
So, they are prepared to take on organizations whom they believe to be misapplying those reforms.
Incidentally, aren’t the Government supposed to be putting money into the National Health Service and not taking it out? I calculate that they have fined the NHS the equivalent of around 150 doctors and nurses salaries for a year.
We know, for example, of one major building society using Grant Thornton’s IR35 test rather than that of HMRC.
One wonders why HMRC think they can create the definitive IR35 test when they lose most of the IR35 cases they fight.
What Percentage of IR35 Cases Against Contractors do HMRC Currently Lose
Currently, HMRC lose 80% of all the IR35 cases they fight against contractors at Employment Tribunals. When contractors win they are often helped via their IR35 insurance by firms like QDOS. This is a big factor in the myriad contractors wins against HMRC.
These wins are despite HMRC being able to cherry pick which contractors to fight out of the hundreds of thousands of contractors in the UK. However, these are usually at the lower employment tribunals and so don’t become case law.
However, when it is a company who are threatened with fines of millions of pounds these cases are likely to take place in higher courts and tribunals. The big companies can afford the fight and they have the very best IR35 experts to help them. And any victory will impact on case law.
What Kind of Foe Will the Government Be Up Against
The Government may have thought that they are were very clever in moving who is responsible for a contractor’s IR35 status from the contractor to the hiring company. However, now they and HMRC will have a much bigger and stronger foe to fight when they are trying to define employment law and IR35.
This is one HMRC IR35 defining battle that contractors cannot wait for.
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