Date: 6 May 2011
Location: Room GE/01, 100 Parliament Street
Time: 11am to 2pm
Sam Mitha (HMRC Policy) (Chair)
Matthew Brown (CIOT)
Chris Bryce (Professional Contractors Group)
Kate Cottrell (IR35 Specialist)
Gillian Econopouly (Recruitment and Employment Confederation)
Samantha Hurley (The Association of Professional Staffing Companies)
Anita Monteith (ICAEW)
Mike Brown (HMRC Operational)
Graeme Conlon (HMRC Technical)
Philip Lloyd (HMRC Operational)
Robin Wythes (HMRC Policy)
Phil Hogan (HMRC Policy)
Priyen Patel (Federation of Small Business)
Anne Redston (IR35 Specialist)
1. HMRC thanked the attendees for their participation in the inaugural meeting of the IR35 Forum.
2. HMRC summarised the background to the establishment of the Forum. Following the Office of Tax Simplification (OTS) review of Small Business Tax, including IR35, the Government announced at Budget 2011 its intention to retain IR35, but to introduce improvements in the way it is administered. The Forum was intended to advise HMRC on tangible improvements and to monitor progress on the proposed changes introduced by HMRC.
3. There was a discussion about the draft terms of reference which had been circulated prior to the meeting, in particular whether they provided sufficient scope for identifying specific areas for improvement in the administration of IR35. The draft terms of reference were adopted following HMRC's confirmation that the reference to 'administration' was intended to be construed in the widest sense of the word.
4. HMRC said that it was important that the members of the Forum should be free to discuss issues which concerned them, if need be on a confidential basis. It was agreed that if, exceptionally, either HMRC or other members wished an issue to be treated as confidential, it would be identified as such before discussion. It was also agreed that subject to such issues, the Forum's deliberations should be characterised by transparency and that its minutes and papers should be published on HMRC's website.
5. It was agreed that members of the Forum from representative bodies or other organisations would need to share information arising from the Forum with colleagues on a confidential basis, so that they could best provide their collective advice or views. HMRC agreed that where an external member of the Forum was an elected official of a representative body or association, it could nominate a permanent official from that body to serve in their stead in the event of a change in the elected member's status in the organisation they represented. Chris Bryce (PCG) requested that the PCG's 'permanent secretary' be Simon McVicker.
6. There was a discussion about the background papers circulated before the meeting.
7. The view was expressed that the paper on the proposed approach to Customer Segmentation did not sufficiently recognise the distinct customer group of employers. HMRC said it recognised that employers and end clients were a customer group which was influential in terms of how individuals were engaged, and the development of this approach would reflect their role.
8. Reference was made to the fact that the drive for individuals to provide their services through intermediaries comes from a number of different parties including employers, end clients and employment agencies.
9. The view was also expressed that the approach to customer segmentation proposed did not adequately recognise that there were professional contractors and temporary workers in the labour market. Some temporary workers use agencies because it was often the only way they could obtain work. There were big differences between professional contractors and temporary workers, but it was not always easy to identify them. There were circumstances where IR35 was clearly relevant e.g. where a well paid employee decided to leave allegedly to set up in business on their own account, but then merely sold their services solely to their previous employer. But there were occasions when what HMRC regarded as attempts to avoid tax were simply a reflection of what some people had to do to get work.
10. Other approaches to segmentation were discussed including segmenting by reference to contractual relationships. HMRC agreed to consider how the segmentation model might be expanded to reflect wider considerations.
11. 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 that in fact 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.
12. There was a discussion about whether there should be greater transparency about HMRC's criteria for risk assessment, and how it selected cases for IR35 reviews. HMRC 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. This was precisely why HMRC believed that customer segmentation was the best way for reforming the administration of IR35; it would enable individuals to identify whether HMRC considered them to be low, medium or high risk.
13. HMRC agreed that those who were clearly outside the ambit of IR35 should be given assurance through clear guidance that that they did not need to worry about IR35 and said that it would value the Forum's help in commenting on its draft guidance.
14. It was observed that there was a lack of consistency in the way HMRC managed its risk assessment and case selection procedures across the country. HMRC said that it applied its risk assessment criteria on a consistent national basis, and that there were standard national processes. The move towards conducting IR35 reviews through specialist teams would reduce the likelihood of inconsistency. HMRC said that it would be glad to investigate any evidence suggesting that IR35 cases had been selected or reviewed in an inconsistent way. It would not however be able to provide any information about whether and if so, what action it might have taken following the provision of such information because of the need to protect taxpayer confidentiality.
15. It was further observed to HMRC that some cases were not worked as efficiently as they should be. It was noted that the Employer Compliance Officer (ECO), who was closest to the case, was responsible for establishing the facts, but that he or she was then required to refer them to a Status Inspector, who sometimes asked the ECO to get more facts. As a result, a case could sometimes 'go around in circles'. It was suggested that HMRC should consider giving someone sole ownership of a case. HMRC explained their current approach to undertaking IR 35 reviews and agreed to consider carefully the Forum's concerns regarding that approach.
16. The OTS review had noted that there was a perception on the part of some of mistrust about HMRC practice, and it was suggested that this reflected what actually 'happened on the ground'. HMRC had to demonstrate that its activity wasn't targeted at certain sectors or in some specific regions. It was observed that cases were often being worked for four to five years; there had been a particular instance where HMRC had been required by a Tribunal hearing to make an apology.
17. HMRC asked for specific examples to be provided of compliance activity being targeted at sectors or geographic regions, so that it could investigate them. It was agreed the focus should be what happened now and in the future, rather than past cases. It was further agreed that HMRC should provide details of the elapsed times in support of the assertion that of the cases currently working the vast majority were less than one year old, and that the median date of commencement of IR35 reviews was April 2010; and that there were only a handful which were commenced prior to 2009.
18. HMRC said that it believed that the broad strategy should be to:
19. There was a 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.
Action Point: Forum members to provide specific examples of HMRC reviews being
targeted at sectors or geographically.
Action Point: Forum members to refer to specific current IR35 cases that are old (18 months).
20. There was a discussion about whether it would assist taxpayers in gaining certainty about their position under IR35 if a 'gateway test' with elements similar to those proposed in the PCG's submission to the OTS was developed for incorporation into HMRC guidance. There were some concerns about how such a test would in fact operate in practice, and in particular how they might be aligned with the status tests derived from case law.
21. 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.
Action Point: HMRC to draft guidance and outline 'gateway test' model for comments.
22. HMRC addressed concerns expressed about whether contacting the helpline would automatically render the enquirer vulnerable to a formal review by explaining how the two experienced officers operated a very strict policy of not referring any customer service enquiries to investigating colleagues. HMRC reiterated that cases were only taken up for review on the basis of risk assessment by officers who were not involved in dealing with queries on the helpline.
23. HMRC agreed to investigate the scope for recording calls and providing those who contacted the helpline with a reference number that could provide a clear audit trail of them having sought HMRC's views before entering into contracts.
Action Point: HMRC to consider the feasibility of providing an audit trail for phone calls to helpline.
24. There was some support for a separate Code of Practice (COP) for IR35. HMRC said that COP tended to operate through factsheets and were designed to cover a range of tax and other responsibilities, not specific to IR35. It was agreed that whatever was developed should provide clarity and certainty regarding the conduct of formal reviews.
25. HMRC mentioned that it had received approaches from other individuals and bodies keen to participate in the Forum. It was agreed that increasing the size of the Forum beyond its current size might make it unwieldy, but that other bodies should be encouraged to contribute to its deliberations, particularly if they had particular expertise or information.
26. There was a broad consensus that the meeting had been productive and constructive and that in order not to lose momentum the next meeting should be held within 6-8 weeks.
29 June 2011 (11am to 2pm) at 100 Parliament Street