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The row started after IR35/employment status expert Kate Cottrell of Bauer and Cottrell penned an article for Shout99 about the new tests. (See: Value of IR35 tests 'extremely limited - Shout99, May 2012).
Kate has been a regular contributor to Shout99 for many years and is a member of our panel of experts. She is ex Inland Revenue and now runs her own business, Bauer and Cottrell, which specialises in tax status/IR35 and technical NIC and Tax problems for contractors. Kate was one of the original advisers to the Office of Tax Simplification (OTS) and has been involved throughout the establishment and operation of the IR35 Forum.
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As a member of the IR35 Forum and an adviser to the OTS, her article included the role that freelancer trade group, the PCG, has played in the process. This has an area of debate for some time as many were surprised that the trade group chose not to push for abolition of IR35 in the original proposals, but introduced and supported the idea of a series of business tests. Shout99 had previously published PCG's reaction to the publication of the tests.
Kate's article appeared on Shout99 on Friday, May 11. Later that evening, the PCG press office circulated a response to it, which included calling into question Kate's 'true motivations' for taking a seat on the IR35 Forum and suggesting that her business interests might have 'impaired her ability to commit to improving IR35'.
Shout99 offered Kate Cottrell an opportunity to respond to the comments and the personal attack. I now run both the PCG's statement and Kate's reaction to it in full.
PCG response to Kate Cottrell
PCG would like to correct a number of factual inaccuracies in the Shout99 article “Value of IR35 tests ‘extremely limited’” and the ContractorUK article “Where are we now? An IR35 expert’s view” in which Kate Cottrell offers her perspectives on HMRC’s latest guidance. We are the only not-for-profit representative association for freelancers and we are committed to securing a better, fairer environment for the UK’s 1.6 million freelancers.
As is stated in the article, we were members of the IR35 Forum along with a number of other bodies. We first proposed a system of ‘business tests’ to the Office of Tax Simplification (OTS) before the creation of the IR35 Forum. Far from being rejected by the OTS, as Ms Cottrell suggests, the ‘business tests’ were one of three options, including abolition which they put forward to the Government.
In the end the Government opted not to put the “business tests” into legislation, which was our original proposal. However senior Ministers and HMRC officials made it clear to PCG that the “business tests” could play a key part in HMRC’s new guidance, and this is what has happened.
Five major organisations, representing businesses, freelancers, the recruitment industry and the freelancer services industry all put their name to a joint statement criticising HMRC’s final decision to press ahead with a scoring system for the tests which could ultimately render them ineffective. Ms Cottrell claims that “none of these parties [...] were present” at an “IR35 Forum meeting yesterday [10th May]”. No such meeting took place. An “operational approach meeting” for specially invited representatives of the accountancy profession did take place on this date, but as we are not an accountancy practice we were not invited, nor would we expect to be. The same is true for the other four organisations named on the joint press release issued yesterday. Therefore it is incorrect to imply that we avoided or refused an opportunity to discuss this issue with HMRC, on the contrary we have been present at every meeting of the IR35 Forum, unlike Ms Cottrell.
Like any professional organisation, PCG has engaged constructively with all the other members of the IR35 forum, and we have kept abreast of their views and respected them. Ms Cottrell, however, has repeatedly been alone in voicing her support for HMRC's position, including implementing the business tests with flawed scoring. She has not sought to engage with us constructively, instead choosing to criticise PCG in two ill-informed and ultimately misleading articles on popular contractor news websites.
Ms Cottrell also says “If you could stand up tomorrow and shout that 95 per cent of contractors are low risk it would make no difference whatsoever to the need for them to consider their IR35 status for each and every contract they undertake.” This is directly at odds with HMRC’s own guidance. If a contractor is “low risk”, HMRC commit to not undertaking an investigation for three years, provided that individual’s way of working does not substantively change. Of course, PCG believes HMRC’s current scoring fails to identify a sufficiently large proportion of “low risk” businesses– but it is simply incorrect to suggest that being classified as low risk makes “no difference whatsoever”.
Finally, it is extremely disappointing that Ms Cottrell concludes that the new measures “cannot be seen [...] as a missed opportunity, as there was no opportunity”. It is clear to PCG and presumably to every other member of the IR35 forum that the formation of the forum presented a clear opportunity to improve the way IR35 works. Indeed the Forum’s purpose, in its own words, is to “advise on improvements in the administration of IR35” (http://hmrc.gov.uk/consultations/ir35forum-tor.htm).
If Ms. Cottrell does not believe this is an opportunity to improve IR35 then it brings into question her true motivations for taking a seat on the IR35 Forum. Ms Cottrell’s business of reviewing contracts to test their IR35 compliance may make her knowledgeable about the subject, but it also appears to have impaired her ability to commit to improving IR35.
As a not-for-profit association, run for and by its members, we remain committed to securing a fairer and better environment for freelancers and contractors. To this end, we will be constructively engaging with the IR35 Forum, consulting our members extensively, and engaging positively with other relevant bodies. We will constructively criticise HMRC where necessary, and our primary goal is to help and support our members and the wider freelance community.
Kate Cottrell's response
Just for the record.......
I will deal with PCG’s points in the same order for ease as follows:
1. What did the OTS recommend?
The OTS put forward to Government two lead options, suspend IR35 pending any acceptance of the merger of income tax and NIC, keep IR35 and improve its administration and only if these two options were not accepted to consider the third option, the business tests and stated “If this policy is considered, the evaluation of fiscal risk will depend on the difficulty of the test and could result in the removal of too many individuals from IR35 as the experience from Australia shows. The OTS recommends rigorous analysis and consultation on the criteria to be used in a possible test prior to implementation.” The OTS report also noted that it “received views from some of our Consultative Committee in support of this option and some very strong views against, on the basis that it adds another layer of complexity.” The Government chose to keep IR35.
2. Senior Ministers in favour of the business tests
PCG raised this point during an IR35 Forum sub-meeting arranged and hosted by PCG that I attended but when challenged would not elaborate.
3. The IR35 Forum meeting PCG says “No such meeting took place”
I confirm that I attended this meeting alongside three from the accountancy professional institutes but the majority of attendees were from other organisations well known for representing and defending freelancers, including Qdos Consulting, CCH Wolters Kluwer, Abbey Tax and I understand that Crawford Temple from Professional Passport was invited but unable to attend. Formal minutes are expected to be published.
4. “Cottrell not present at some IR35 Forum meetings”
Yes I missed the second IR35 Forum sub-meeting, organised and hosted by PCG. My reason for not attending this meeting is because of the conduct of the first meeting where I felt that I was being attacked for holding a different view and I was not at all comfortable with the frequent use of bad language.
I also missed one formal IR35 Forum meeting owing to a medical emergency. I understand that this meeting entailed going over the business tests and the scenarios once again and I had already provided a comprehensive paper on these subjects to HMRC so this was not a critical meeting for me.
5. Constructive engagement – Ms Cottrell is “alone”
Well yes there are five organisations that are not happy with the tests as they stand and PCG states this is the majority of the IR35 Forum. However, there are five other members of the Forum including me and most are yet to give a public view. The point I have been making in my articles is that, quite correctly, HMRC has been consulting on this issue far and wide. This is not just about what these five or indeed 10 have to say and HMRC has involved everyone who has either expressed an interest or directly approached those it considers important in the industry for their views. I am entitled to my opinion and am certainly not alone in the views that I hold.
6. Cottrell at odds with HMRC guidance and business tests make no difference
Yes I said "If you could stand up tomorrow and shout that 95 per cent of contractors are low risk it would make no difference whatsoever to the need for them to consider their IR35 status for each and every contract they undertake." PCG says “This is directly at odds with HMRC's own guidance. If a contractor is "low risk", HMRC commit to not undertaking an investigation for three years, provided that individual's way of working does not substantively change. Of course, PCG believes HMRC's current scoring fails to identify a sufficiently large proportion of "low risk" businesses- but it is simply incorrect to suggest that being classified as low risk makes "no difference whatsoever”.
Well clearly I did not say being low risk makes no difference! What I did say is that it makes no difference for the need for them to consider their IR35 status for each and every contract they undertake. Yes if an individual can prove they are low risk they will be left alone for three years. But HMRC’s guidance also states “If you are in the ‘low risk’ band, you may happen to enter into an engagement which is within IR35. If so, your intermediary must apply the IR35 rules to the income from that engagement. See under ‘High or medium risk’ on page 7.”
7. Lack of opportunity to change the IR35 legislation means Cottrell’s “true motivations” are called into question by PCG
I maintain that the creation of the IR35 Forum and the remit to improve the administration of IR35 has never been an opportunity to change the legislation as the legislation has not changed. In my opinion, having easy business tests, which would put the majority of individuals at low risk would be naive in these circumstances especially when there is currently the biggest focus on those affected by IR35 for 12 years. My motivation has been to improve the whole of the administration of IR35, to make sure that investigations do not go on for years, to improve the guidance and reduce the fears for those new to contracting or those sadly forced to operate limited companies. I have chosen to provide numerous papers and evidence to ensure that IR35 will be improved, despite the constraints of unchanged legislation, rather than concentrate entirely on the single minor issue of business entity tests.
8. My greatest achievement
I have provided numerous papers and input into this mission to improve the administration of IR35 and will continue to do so. As above I have concentrated on the whole process and how to make things better for all those affected by IR35. I am delighted that HMRC has taken fully on board most of my suggestions but the best one for me is that the starting point in any IR35 investigation will be to ask the individual why they think IR35 does not apply. This will give everyone who has considered IR35, their contracts and the all important working practices, the ability to reply and potentially stop the review in its tracks and take further comfort in knowing that they will not be approached again for three years. This new process rewards those that have bothered to consider their status and I envisage closure for Bauer and Cottrell’s clients, who are outside IR35, being achieved rapidly not least because we have properly been considering the working practices as well as the contracts since 2003.
Summary
In summary, I am accused by PCG of writing “factual inaccuracies”. This is not true. I am also accused of not constructively engaging with them and to this, I would say, that it is plainly obvious to most, that such engagement is not possible if you dare to hold a different view. As to their, at best, defamatory comments I would simply ask, is this PCG press release indicative of an organisation whose primary goal is to help and support its members, many of whom are also my clients?
Related stories on Shout99
For general coverage of IR35 policy and cases, see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2012
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