IR35 has consistently attracted controversy since it was introduced in 2000. We have shared various updates and insights on IR35, as the complexities surrounding its application are still ongoing.
Recently, HMRC published its 2022-23 annual accounts. This showed that HMRC engaged 1,096 temporary off-payroll workers – 89% of these workers were engaged by HMRC, 10% by its agency, the Revenue & Customs Digital Technology Services (RCDTS), and the last 1% by the Valuation Office Agency (VOA). Interestingly, 95% of workers were listed as not subject to IR35 off-payroll working (OPW) rules, while the rest were deemed to be within.
So, what conclusion can be drawn from the above data? It does seem to indicate that HMRC is adopting a blanket ban on contractors outside of IR35, something that is considered as ‘not taking reasonable care’ in determining a contractor’s employment status, according to HMRC’s own guidance.
However, HMRC has strongly refuted this by pointing to the continued use of outside contractors. This is supported by the increase in expenditure on consultancies from £1.8m to £5m. Furthermore, HMRC states that “We apply the IR35 OPW rules in the same way as we expect other organisations to, ensuring the correct tax is paid”. This is not the first time HMRC has been accused of operating a blanket ban on contractors outside of IR35. HMRC’s 2020-21 accounts showed a similarly low number of contractors engaged outside IR35 OPW.
Our comments
Aside from evidence suggesting that HMRC is not following its own guidance, the data also raises questions as to how the contractors were engaged if IR35 OPW rules did not apply in 95% of the cases. The only conclusion that can be drawn is that the contractors were engaged via an umbrella company. The umbrella company sector has long been linked to non-compliance and tax avoidance schemes, which is why there is currently a consultation on how best to regulate them. The consultation closes on 29 August 2023.
Considering the above and the legislation containing transfer of debt provisions in event of non-compliance in the supply chain, it will be interesting to see how far HMRC will accept accountability if it gets caught in a supply chain non-compliance/tax avoidance scheme.
The main takeaway from the above is that, although it can be administratively burdensome, you do not have to adopt a policy such as a blanket ban. IR35 can be managed if the company has the right processes, controls, and governance in place. This will outweigh any costs of administration, third party costs, and more.
We have a variety of services that we can offer in relation to IR35. Please contact our Employment Tax team should you have any questions.
