IR35 - there is another way

The continued wait for this year’s IR35 Consultation (Edit - released the day after this was published), which seems to be endless, is starting to produce a range of new and interesting theories about what might replace a straightforward private sector roll-out, if that (as some are saying) is less and less likely.

Surely then an alternative to the most simplistic IR35 reform is worth considering. I have my own solution, focussed on data. Data is confusing to many, and processing it can be troublesome and expensive. But if there is a method of improving IR35 compliance using data, and avoiding a repeat of the chaos that the IR35 changes in the public sector in April 2017, then surely it would be irresponsible not to examine it.

At consultation round tables in 2016 focussed on IR35 reform, I asked HMRC why they wanted to make changes now, instead of improving enforcement. I was told that enforcement was expensive, and that IR35 hadn’t worked properly for 15 years, and Something Must Be Done. Implicit in this argument was that unless something changed, some new factor was brought into play, IR35 would continue to Not Work in the eyes of HMRC. 

But they had something new – Data – lots of new data, that told them new things, if they interrogated it properly. The Agency Reporting Regulations required agencies to send data every three months to HMRC showing who they had paid where normal payroll deductions hadn’t been applied – for example to Personal Service Companies (PSCs). These rules came into force in April 2015. Alongside this data of course, HMRC had RTI data which was now being collected every month, from the same PSCs (and everyone else running a payroll).

Now, if IR35 is intended to ensure that people operating through a PSC are properly applying payroll deductions to those assignments that fall inside IR35, it would be sensible to use a risk-based approach to see what patterns are visible from this data. It would be simple to see which agencies seem to have higher volumes of low rate PSCs on their books – and focus enforcement energies there. They can cross reference this information to RTI reports from those PSCs, and see straightaway who is applying IR35 to their payments, and who is not. This then indicates if more information is needed to understand why a particular agency has a large volume of PSCs that need to be examined.

Of course, lower rates are not necessarily an indication of IR35 status, they are just one possible risk indicator. However, in order to use enforcement action most efficiently, the mapping of risk factors onto employment intermediaries is a very powerful way of prioritising spot checks, and not using this approach as part of enforcement is surely irresponsible. Especially when one of the alternatives is a repeat of the omni-botch of April 2017.

We now have the continued line from HMRC that April 2017’s changes improved compliance in this sector. However, it seems clear that included in this ‘compliance’ is a number of workers who have moved to the darker end of the umbrella company spectrum, taking solutions from newly-established operators with questionable intentions. Can this really be viewed a success from any perspective? I would say no. And if there’s no evidence to back this up, then a further roll-out can’t be justified – repeal in the public sector would be the fairest outcome.

So come on HMRC – use your data to enforce efficiently, and show us some data to reassure us that the April 17 reforms actually had a measurably positive impact. This will be a valuable piece of one-off project work – and of course perfect for contractors!

Chris James is an IPSE accredited, award-winning Chartered Accountant. He believes taxes are necessary but should be collected based on the law, not based on the interpretation of the person shouting loudest in the room.

He is Head of Accounting Services at JSA Group, which provides accounting, payroll, umbrella and business advisory services to small businesses, contractors and freelancers across the UK. He also serves on the Board of the FCSA.