Chinese whispers - IR35, HMRC and the 90% stat.

By Dave Chaplin

Many will be surprised if they hear me sticking up for HMRC as my recent observations of their efforts to implement the IR35 reforms have been, shall we say, less than favourable. But I thought it might be useful to clarify what HMRC did or didn’t say about the percentage of contractors not complying with IR35 legislation, and to provide some background which may help to frame our future lobbying efforts.

 HMRC said:

“90% of all contractors who should be applying IR35 are not complying with the legislation.”

This, through Chinese whispers and understandable misinterpretation, has become accepted as HMRC claiming “90% of all contractors working in the public sector should be caught by IR35.”

 But that’s not true, and not what they said.

To offer a simple analogy, in grocer shop terms: “90% of all fruit in the shop that is mouldy has not been removed, ” is entirely different to saying “90% of all fruit in the shop is mouldy.”

 So, where did this 90% number come from anyway? I may have the answer....

I was part of a round table at HMRC a few years ago discussing the potential IR35 Reforms. One of the panel was a contractor, and he said "In my view 90% of all contractors should be caught by IR35." After spitting out my tea and falling off my chair, I challenged him, very robustly, on the basis/evidence of his claims and also asked him some direct questions about his understanding of what it meant to be an employee in terms of employment case law.

It was clear fairly quickly that he knew diddly squat about what it meant in law, and that his definition was exactly the same as the usual interpretation by HMRC - that being the argument that two people doing the same kind of work in a firm, one an employee, one not, meant that the contractor should really be an employee. For those of you who understand case law you will know his interpretation and HMRC's is complete nonsense.

The HMRC chair quickly scribbled the number down, and then after I'd rumbled him he was asked to provide evidence in his submission to back his claims. Who knows what he wrote. But, this 90% number has surfaced time and time again. There has been no empirical evidence published of course. But to be frank, it would only matter if HMRC were indeed claiming that 90% of contractors are within IR35. They aren’t.

When it came to the day of IR35 judgment in the public sector there were indeed lots of contractors who were clearly inside IR35 working in relatively low paid positions in the public sector, many of whom were in the health sector. We have tested thousands of them on www.ir35testing.co.uk who had no chance of passing IR35. But IMHO, what should have happened was for those workers to be moved to fixed term employment contracts, or self-employed and for the NHS to pick up the tab for the extra “Deemed Employers NI” due - and not expect their now deemed employees to pay their employers NI tab. But the NHS decided to "hold the line" and pass their extra Employers NI cost onto the contractor, by way of a massive pay cut for the contractor - and it has meant misery and hardship for many low paid health sector workers.

This won’t be happening in the private sector in the same way of course, because HMRC won’t have the same opportunity to bully and intimidate the firms as they did in the public sector. And I hope that the backlash from business lobby groups is going to be fierce when they find out the extra cost their members will have to pay to assess contractors as deemed employees.

2018 is going to be an interesting year.

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About Contractor Calculator - We’ve been online and independent since 1999. Still owned by founder and former IT contractor Dave Chaplin, the business has grown dramatically since then to become the expert guide to contracting. The team have created a free independent IR35 testing tool to enable contractors and agencies to ascertain their IR35 status. Developed with input from employment law status experts, the IR35 Test was first released on ContractorCalculator in 2009 and has already been used by over 100,000 contractors. To reduce your risk of investigation and tax liabilities visit www.IR35testing.co.uk to take your free test now.