Navigating tricky waters

29th August, 2019

Navigating tricky waters

Back in May 2019

In what will be a bitter pill for many contractors, just before the long weekend (coincidence?) many working at GSK received news that HMRC considers them to be inside IR35 for tax purposes. If this is correct it means that the intermediary – usually the contractors own company – is liable to deduct tax and NIC from payments deemed to be employment income of the individual.

Why GSK? Nobody, least of all HMRC, is saying. There is no suggestion that terms and conditions at that company are in any way influencing the unilateral HMRC declaration and no suggestion that GSK has done anything to create this situation.

More likely is that this is the opening salvo in an HMRC campaign which has been months in the planning. The reference at the bottom of the letter is May 2019. Why then wait nearly 4 months to ensure they arrived at a time best suited to cause anxiety and distress? Regardless of the employment of such psychological tools, HMRC has a longer and broader plan. First, shake the tree and see who falls out. Second, identify the definite “outside IR35” cases. Third – those remaining are fodder for IR35 status enquiry for 2018/19 and perhaps earlier years.

Seduced by the sums

Why? Simple. HMRC’s credo is to “maximise revenue”. Their internal numbers say that 90% of contractors are non compliant, i.e. not inside IR35. Difference in year to year tax take between an inside and outside IR35 contractor is perhaps 15% of income. (The difference over any reasonable time period is actually almost nothing). So this opening barrage of 1500 letters, means that 1350 may have to pay more tax for last year. Around 15% more of an average income of say £70,000. That’s £10,500 x 1,350 = £14.175m.

Multiply that by say two and half years (anecdotal evidence that this is the average stay of a contractor) and it’s £35.437m. From one company. How many contractors at large companies? HMRC say 170,000. The same arithmetic gives a value north of £4bn.

Easy to see the attraction. Unfortunately I think the allure of that sort of value, coveted by a Civil Servant looking for recognition, promotion, perhaps a gong, has blinded them to some of the practical difficulties.

Dubious measures

IR35 is not a one size fits all tool. Much though HMRC would have believe that CEST is the answer to all questions as to status, it is not. It is deeply flawed and HMRC by initially defending it and only begrudgingly agreeing to changes forced upon them – which have still not arrived – has only served to reduce it to a meaningless shadow. Not one of the recognised advisers in this space believes that CEST is accurate, useful or capable of being deployed on a large scale.

Despite HMRC claiming in the letter to GSK workers that they have “information” leading them to the conclusion that all of them – no exceptions – should be deemed to be employees, they have not produced it. Nor have they opened enquiries. Nor have they explained that they have no statutory basis for the deadlines in their letter – littered with implications that failing to do so brings penalties. For what? For not responding to what amounts to an opinion from HMRC. I don’t think so.

No. IR35 is like a tailor making a suit to measure. It has to fit every curve, ridge, bump and swell of the job being done. It is not a size 42 large which fits some and not others. Every individual in GSK (and elsewhere) can argue their case, if necessary at Tribunal. Many will.

Pricing up

Let’s do some more arithmetic. Say 1,350 contractors are potentially inside IR35. Many will have insurance. Many more will agree that paying even one year of additional tax (£10,500) is too much and they would rather spend that on a defence. Let’s say that 1,000 of them decide to fight. The chances of that actually being 1,000 separate and distinct cases is low. There will be similarities between them. Even so perhaps 200 representative cases.

Each of those will cost perhaps 150 hours in HMRC. (Bearing in mind the criticism recently in HMRC case preparation, this is a minimum). That is 30,000 hours. Some 24 man years. Average HMRC salary for this officer level? No idea, say £40,000. That’s £0.9m. Add legal costs. Say £100,000 a case? That’s £20m. So around £21m plus tying up Tribunal for decades. And this is just one company. What happens when we multiply to cover the whole workforce?

What price the credibility of HMRC and what is the cost to their integrity of this exercise? It can’t be calculated.

Steering a course

Unfortunately it may be that HMRC has already crossed their Rubicon and decided that “Nothing is more despicable than respect based in fear”.

Understanding the basis of this HMRC campaign, where it is likely to go, the legal rights and obligations of all the parties, the motives of the players and the likely outcomes is crucial. Each party has its own reasons and these will be coloured accordingly. The course each one takes will also dictate the path piloted by the contractor. It’s easy to forget in all this noise that the individual at the heart of the equation carries accountability but may not be the captain of their own destiny.

We have seen suggestions that the group model that we, WTT Consulting, pioneered in this sector, can play a part in this campaign. We agree, but it will be limited. This is not deconstructing an historic scheme used by hundreds in exactly the same way. It is instead a group of connected people working at the same end client on multiple terms and jobs. Whilst there are some commonalities, ultimately it is individual. In the event that certain roles can be grouped, then yes, we can apply economies of scale. Otherwise we need to convince individuals to finance representative cases at Tribunal.

Navigating these waters for the individual will not be easy.

Nonetheless, HMRC’s fleet has displayed its colours and fired the opening rounds into a scattered and vulnerable collection of fragile vessels. As was demonstrated in other conflicts, the proper response is to form convoys for mutual protection and delivery of outcomes. Stragglers can and will be picked off. These convoys will need protection and building and organising that protection has to begin – now.