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UK – HMRC reform lacks clarity, recruitment representatives argue

11 May 2012

Key advisors to HMRC from the recruitment sector claim that the new IR35 guidance published this week fails to take into account key elements of their advice and will not bring clarity, transparency or fairness in dealing with organisation over IR35.

IR35 legislation was introduced to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise for tax purposes, be regarded as an employee of the client; and for NICs purposes, be regarded as employed in employed earner’s employment by the client.

The IR35 Forum was set up in 2011 to explore new approaches to the way IR35 is administered and monitor progress. It consists of representatives from HMRC, industry organisations and independent tax experts.

But as the report is published, members of the Association of Professional Staffing Companies (APSCo), the Freelancer and Contractor Services Association (FCSA), Federation of Small Businesses (FSB), PCG and Recruitment & Employment Confederation (REC), the bodies representing small businesses, the recruitment sector, freelance services sector and freelancers claim the new IR35 Guidance fails to take into account key elements of their advice.

These organisations are united in their concern that the measures suggested in the HMRC report will not go far enough and will not reflect the new approach promised by the Government at the 2011 Budget.

While accepting new advances such as better guidance, more detailed scenarios, improved helpdesk, better trained teams and quicker decision making are positive steps forward, there is a strongly held view by some of the external bodies on the IR35 Forum that HMRC has missed a real opportunity to introduce clarity and fairness when introducing ‘business entity tests.’

The group feels that the questions, the scoring and the proposed use of the business entity tests are counter-productive and represent greater complexity rather than a simplification of IR35 that had been the Government’s goal. The feeling of frustration was summed up by Ann Swain of APSCo who said external forum members had, “worked really hard to come up with a new approach and had achieved positive progress in some areas” but, she added many felt exasperated by HMRC’s reluctance to listen to their advice concerning the new tests.

Chris Bryce, PCG Chairman and IR35 Forum member backed this view saying:

“HMRC’s new guidance demonstrates their fundamental lack of courage and commitment to improve the operation of IR35.  While the external members of the Forum have worked tirelessly to develop innovative solutions, HMRC appear at this stage to have opted for a risk averse approach that will not deliver the improvements that are so clearly needed. ”

The main unrest from the Forum revolves around the proposed ‘business entity tests’, or more specifically, the scoring of the tests. External members challenged HMRC to amend the scoring of the tests, branding the distribution of points as unfair and not reflecting the realities of how businesses operate.

Despite this groundswell of opinion, HMRC have refused to alter the allocation of points. Reflecting his unease on this issue Martin Hesketh, FCSA’s representative on the Forum said:

“The proposed scoring system undermines the business entity tests altogether.  It will push a disproportionate number of businesses into the high-risk category, and in so doing will prevent genuinely high-risk cases from being identified. An alternative scoring system, backed by a majority on the Forum, was suggested but to date those suggestions have been rejected by HMRC.”

The IR35 Forum will now monitor the impact of the new measures over the next 12 months in what HMRC have termed, ‘the test and learn phase’. Over this period the industry associations will continue to challenge HMRC to adopt a more radical approach.  Gillian Econopouly, Head of Public Policy at REC, said, “Although we are disappointed by the progress to date, we will continue to strive for a better outcome for businesses affected by IR35.”

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