IR35 in a political context

IR35 has been around 21 years. That Budget 2000 press release has been through changes. It is axiomatic governments are short of money. The self-employed reduce tax by paying cheaper Class 2 and 4 NICs and forming companies selling their services, paying themselves with dividends attracting no NICs at all. Service users (we shall neutrally term them) are keen that workers (also neutral) do this as employer’s NIC is saved, currently 13.8% of all earnings.

It is axiomatic governments are short of money. The self-employed reduce tax by paying cheaper Class 2 and 4 NICs and forming companies selling their services, paying themselves with dividends attracting no NICs at all. Service users (we shall neutrally term them) are keen that workers (also neutral) do this as employer’s NIC is saved, currently 13.8% of all earnings.

The ultimate stealth tax in terms of revenues, NI rate hikes made this increasingly profitable for workers and service users alike. Since the 1960s employees’ NI rate has doubled; employer’s NI is up 130%. This led to more labour becoming self-employed; up from 3.5m in 1992 to a pre-pandemic 5.05m.IR35 and its successors are Government’s efforts to make it more difficult to be self-employed. They operate in three ways: narrowing scope for self-employment, creating doubt about status, both sometimes abetted by the courts, and being aggressive in pushing re-classification, punishing those who get it wrong with penalties and interest.

Capricious courts

Self-employment is not defined in tax statutes. Its scope is shaped by ‘developing’ case law - a euphemism. This had proved unsatisfactory; it creates uncertainty that seems an unspoken part of the government/HMRC agenda – fear of the consequences of classifying self-employed and losing. Tax cases come to court because taxpayer and HMRC each thinks he can win. Nowhere is the result more uncertain than on employment. Decisions are unpredictable; perhaps that’s the fun of litigation, at least for those who watch from the side-lines.

Until the IR35 thrust by HMRC not many employment status disputes reached the courts. The rules were well established. The self-employed worked for more than one service user, are free to turn down work, choose working hours, define the approach to the job, own their equipment. But in succeeding cases each side proposed fresh concepts intended to benefit their own cases. The most important of these have been substitution and mutual obligation.

HMRC suggested a service user must allow a self-employed worker to provide a substitute worker and the worker must be able to do so. It is unclear how this arises or how it can be correct. A sole practitioner accountant or solicitor runs his own office, chooses to accept or reject assignments, sets the fee, decides his work periods, is responsible for the result (to the point of being sued if an error is made), has many clients, an independent office, owns the work tools. Yet unless qualified staff are employed, substitution is impossible. No-one, even HMRC, suggests such workers are not self-employed. Perhaps because of this apparent glaring anomaly, the substitution requirement has by no means been universally upheld by the courts.

Mutual obligation was aired by barristers representing taxpayers claiming to be self-employed. For an engagement to be employment worker and service user must have obligations to the other that form a continuing relationship. The worker is bound to work for the service user and the service user bound have the worker do the work. Courts have held this is a requirement of employment; it is reasonably well settled. This holed the Revenue’s boat in relation to many recent challenges and a string of cases were lost. Having been unable to persuade the courts to dismiss mutuality as a requirement of employment, HMRC has turned to attempting to reduce its importance from necessary to, say, helpful in arguing for employment. They have so far not succeeded.

A new offensive

In the face of this failure, HMRC brought forward new law making government departments responsible for determining status of workers supplied through an intermediary with, in theory at least, the prospect of dire consequences if they erred.

That might be amusing if it were not ironic. HMRC and by extension the Treasury want to reclassify the self-employed, so it remains curious that in efforts to reduce costs many government departments were allowed to exploit questionable classification of workers as self-employed. This was exposed in the press. There was a large number of allegedly NHI self-employed contractors at all levels. Many senior BBC staff were contracted as self-employed. Yes, and even HMRC took on as self-employed some staff recently retired from senior HMRC employment roles.  In many cases, the workers were required to work hours set and at locations specified by the department.

Robbing Peter to pay Paula, spending department costs were cut but tax revenues reduced by the same amount. Perhaps understandably HMRC took few employment cases against government departments, save some well publicised ones not involving a department but against highly paid TV presenters – with mixed results.

This is a mess. Next month we will consider what needs to be done.

Michael Quinlan