HMRC v Big Business Over IR35
HMRC has hit the Department for Environment, Food and Rural Affairs with a massive bill of £86.5m for ‘getting off payroll wrong’.
Defra had used the CEST test created by HMRC for assessing whether contractors were outside or inside IR35. However, according to HMRC, Defra had got it wrong.
As a public company Defra have to take as gospel HMRC’s view as to whether their contractors are inside IR35 or outside IR35. The fact that HMRC have lost so many court cases when contractors have taken them to courts shows that a HMRC view on whether contractors are inside IR35 or not is not hard fact.
As there’s no way that one public sector department can take another public sector department to court to challenge HMRC’s views, then HMRC are the judge and jury. If they say Defra’s contractors are inside IR35 then there’s nothing public sector departments can do or say about it.
Defra was HMRC’s Easy IR35 Target
One wonders if Defra was chosen as an easy target by HMRC and the Chancellor / Prime Minster to encourage the others.
After all, how hard is it to take on a department who cannot defend itself in court?
Other public sector departments will be even more cautious in future as they cannot defend themselves either.
Private Sector v HMRC over Off Payroll
However, that doesn’t apply to private sector companies.
If they feel that HMRC are wrong in their assessments, they don’t have to take that lying down.
Did HMRC intend this Defra move to intimidate public sector companies too?
If they did they may be in for a surprise.
£86.5 million is a lot of money. Indeed, as many big UK companies have far more contractors than Defra it could be much, much more.
Having to pay a fine of that size, or even a multiple of that sum would severely hurt their businesses. It could severely affect their share prices.
However, big companies are not going to accept threats to their profitability like this lying down.
Big UK Companies Preparing for Decisive IR35 Battle
They have prepared and they are preparing further in light of the Defra fine.
Those major UK companies have paid for the very best advice on IR35 that is available.
They have prepared in advance for this battle.
They don’t have to accept what they see as HMRC’s erroneous views on what IR35 is and who is inside IR35 and who is outside it.
Next IR35 Step in HMRC v UK PLC Battle
So, what happens now?
Well, the big companies are well dug in.
They have had the best advice and they have large sums available to fight this.
Will HMRC take them on or do they hope that the Defra ‘verdict’ will intimidate them?
Well, there’s no sign so far that they are intimidated.
Government not Allowing Companies To Operate in an Optimal Way
These big companies know their own businesses better than anyone else does – and that includes the Government and HMRC.
They know the optimal percentage of contractors and of permanent employees which is best for their business.
Any attempt to change this artificially will mean that these companies are not being run at an optimal level for their businesses. Foreign rivals can take advantage of this.
HMRC Must Make the Next Move
Companies don’t need to do anything else in this looming battle except continue to take the best IR35 advice.
If UK companies won’t be intimidated by the Defra ‘verdict’ then HMRC must make the first attack.
They have told the Government that the implementation of the off payroll rules in the private sector will net them as much as £2 billion a year.
It won’t at the moment. They will have to go after big UK companies.
The onus, this time, is on HMRC to prove that many contractors in big UK companies should really be operating as inside IR35 and not outside IR35.
But the big companies will be ready for them. They have already dug their defences.
Lobbying the Government Over IR35 Off Payroll Rules
We saw a few weeks ago in the Trust / Kwarteng budget that big companies had lobbied successfully to get the off payroll rules removed. Unfortunately for contractors poor Liz and Kwasi didn’t last too long.
However, it did show us how successfully big business can lobby.
Will the Conservatives, the party of business traditionally, continue to pound the positions of the biggest UK companies who are also usually their sponsors?
HMRC Will Pick Easiest Target
HMRC will have to move on them to get that £2bn.
They will probably try to pick the easiest target of the big companies to go after first.
However, thee can’t be many big companies who would be likely to hand over perhaps hundreds of millions to HMRC without a fight. They won’t just meekly accept HMRC’s verdict like Defra have done.
HMRC must attack to get that money promised to the Treasury and the big companies WILL defend.
After the initial skirmishes between HMRC and a defenceless Defra, the real battle will commence soon.
And the future of Off Payroll and IR35 itself will be at stake.
Let battle commence!