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The IR35 Forum evolved from the recent review of IR35 by the Office of Tax Simplification (OTS). It was widely thought that this review would lead to the demise of IR35, but, in effect, the Government opted to retain the so-called 'freelancers' tax' while improving its administration by HMRc. One step towards that goal is the creation of the IR35 Forum with independent and external representatives to advise HMRC on administative improvements and to monitor progress on the proposed changes.
Risk assessment
One of the items under discussion at its first meeting was how HMRC selects the targets for IR35 investigations. At the meeting, HMRC said that it was aware that there was a perception among some commentators that it merely 'stuck pins' in lists to decide who should be subject to an IR35 review.
The reality was, it said, that all IR35 reviews were conducted on the basis of risk assessment. It had management procedures in place to ensure that interventions were made where there was potentially most risk. If risk-assessment suggested the possibility of the application of IR35, the case was referred to specialist teams.
However, when HMRC was asked to reveal more details about its criteria in evaluating those who it considered to be 'at risk', it said it was not possible to publish its detailed risk criteria, but it agreed that providing greater transparency about the process might provide greater reassurance to those fearful of being subject to review on a purely random basis.
Customer segmentation
This led HMRC to reiterate its belief that 'customer segmentation' was the best way for reforming the administration of IR35, as it would enable individuals to identify whether HMRC considered them to be low, medium or high risk.
There had been some debate as to how segmentation could reflect the market-place. One example being the differentiation between professional contractors and temporary workers who obtained work through agencies.
Strategy
HMRC said that it believed that the broad strategy should be to:
- Enable taxpayers to decide whether HMRC viewed them as low, medium or high risk (and to make sure that that segmentation was transparent);
- Provide effective targeted guidance for each segment; and
- Where reviews of high risk cases were undertaken, to ensure such reviews were carried out as quickly as possible with as least disruption as possible.
There was also discussion about hypothetical contracts, the behaviour of taxpayers and types of arrangements. It was suggested that the starting point for an HMRC intervention should be to ask whether the contractor had taken 'reasonable care'. HMRC pointed out that this expression should be avoided because it had a specific meaning in the context of penalties, but that it would explore this proposal.
As 'action points' Forum members agreed to provide specific examples of HMRC reviews being targeted at sectors or geographically and identify specific current IR35 cases that are old (18 months).
Gateway tests
DUring the original consultation process, the OTS put three options before Government: to suspend IR35 with a view to eventual abolition; to retain IR35 with improved administration; or - the outside option - to introduced a level of 'business tests' which was supported by freelancer group, the PCG.
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It was suggested that it would be very useful if HMRC could, with the help of the Forum, develop a tool analogous to the Employment Status Indicator. It was noted that a particular difficulty was the fact that a contract between the intermediary and the agent, might not reflect the same terms as the contract between the end client and the agent.
HMRC offered to draft guidance and outline a 'gateway test' model for comments.
For further information see:
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Susie Hughes © Shout99 2011
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