Dave Chaplin of ContractorCalculator addresses some of the information distributed from the Treasury to MPs in answer to questions raised by their constituents about the off-payroll working reforms.
The government has issued a new consultation on extending the off-payroll working reforms to the private sector. While we waited to hear the detail of what HMRC has planned, we urged contractors to contact their MPs to let them know the impact the reforms will have on their businesses and the UK economy as a whole.
The responses are worrying, as hundreds of replies from MPs nationwide trot out similar misinformation supplied by HM Treasury. We have catalogued 23 mistruths in total that we have compiled into a document: Off-Payroll Tax: Treasury Letters Debunked, which is designed to help MPs understand the impact of these reforms.
Below are just a few of the claims made by the Treasury.
The rules only apply to individuals who are working like employees, and do not apply to the self-employed.
TRUTH: The rules apply to every single person who provides services via their own company who are effectively “self-employed” (as many people understand that term) because an in/out IR35 assessment has to be made according to the law. This means an additional compliance protocol must then be followed, based on the result of that assessment.
The Treasury claims that the “self-employed” will not be affected, but the firms that hire them will be. Any complex subjective assessment is not binding in law, thereby creating massive uncertainty. This then places a significant tax risk on the hirer’s business which accumulates year-on-year. Companies need to hire on-demand contingent workers to help them grow but as a result of the off-payroll rules, they will no longer be able to do this without placing considerable tax risk onto their balance sheets. This will negatively affect the market value of companies and makes the UK an unattractive place to locate any growing business.
The estimated exchequer impact of extending the reform to the private sector has been certified by the independent Office for Budget Responsibility (OBR) and reflects the expected increase in compliance with the Off-Payroll working rules.
TRUTH: The OBR figures were given the highest uncertainty rating possible of ‘very high’. The most important sub-factor risk was behavioural, which was also rated very high risk which meant no information was available. Or, in layman’s terms, it was guesswork.
Falling within the off-payroll tax rules does not currently change an individual’s status for employment rights as there is currently no direct link between employment taxes and these rights.
TRUTH: This is misleading. There is one set of rules to determine employment status, in both employment tribunals and tax tribunals, which is the underlying case law. The use of the word ‘direct’ has been used disingenuously like a magician’s sleight of hand.
As with the public sector reform, the rules for determining employment status for tax purposes will not change. Where contractors have been operating the existing off-payroll rules correctly, and paying the right amount of tax and NICs, there will be no change to the rates of tax and NICs they pay.
TRUTH: The new legislation is different from the existing legislation. The ‘rates of tax’ will remain the same, but who pays them changes. Under the off-payroll rules, the hirer is required to pay employment taxes on top of the rate paid to the contractor. Historically, IR35 has required that employment taxes be paid out of the earnings of the contractor. The main issue is employer’s National Insurance at 13.8%, which employers pay on top of the earnings paid to employees. This is not paid by firms who hire the self-employed or contractors working through their own companies.
Using HMRC’s own calculations, employers’ NI accounts for around 84% of the tax avoided in engagements between firms and ‘deemed employees’. If HMRC’s estimate that the off-payroll rules will yield £1.3bn in tax from the economy is realised, roughly £1.1bn will be retrieved from hiring firms.
The off-payroll rules impose a significant additional sum on the cost of hiring contingent labour, where workers are deemed to be within the scope of the rules. However, the Treasury’s failure to clearly communicate where the tax liability lies, its attempts to liken the legislation to an IR35 update, and its portrayal of ‘deemed employees’ as mainly responsible for the tax shortfall, are disingenuous.
In the public sector, there has been widespread non-compliance by hiring organisations deducting their employer’s NI liability from the fees paid to contractors. While the money still makes its way to the Treasury, the flexible workforce is being exploited, and this has encouraged tax avoidance schemes to re-enter the market with vigour. This will happen on a far greater scale if the rules are rolled-out to the private sector.
While the Treasury is doing its best to ignore the real issues, we have had the opportunity to expose HMRC and the government for all the mistruths it has been peddling for years. The changes will cause untold damage through the supply chain. Businesses are going to be hit with extra costs and changes which will give rise to disputes and legal challenges from contractors who have been wrongly assessed and deemed as employees.
We will see endless disruption to projects, as has occurred in the public sector, so we need to call a halt to any further damage. It is disappointing that the Treasury is distributing such a large amount of misinformation.
*5 March 2019 - this article was edited to reflect the publication of the consultation