Ten key points about off-payroll tax
The government has been keen to trumpet the success of off-payroll tax in the public sector. However, according to ContractorCalculator’s Dave Chaplin, there are many points to address before the tax is rolled into the private sector.
HMRC’s published consultation document has been accused of misrepresenting facts, disregarding empirical evidence, lacking objectivity and having a pre-determined agenda. The same can be said about responses from the Treasury to many MPs who have written on behalf of their constituents regarding the matter.
In an attempt to clarify the main issues, here are 10 of the main points, as we see it, about the self-employed, the IR35 legislation and the new off-payroll tax.
What does the evidence tell us?
#1: The majority (84%) of the perceived tax loss is by the hirer, not the individual
As the Taylor Report highlighted, and as HMRC’s calculations demonstrate, workers using limited companies already pay roughly the same rate of tax as employees and sole traders.
The perceived shortfall today is almost entirely caused by the existing payroll tax – namely employer’s NI – being paid by corporations hiring employees, but not self-employed individuals. Only a new comparable tax for organisations hiring workers ‘off-payroll’ would restore parity.
#2: HMRC’s claims regarding the cost of non-compliance are warped, due to its failure to recognise the ‘freelancer premium’
The calculations underpinning HMRC’s off-payroll tax contain a fundamental flaw: reliance on the assumption that the cost of an individual is the same whether hired as an employee or as self-employed. It isn’t.
The self-employed charge a ‘freelancer premium’, typically 50% more than a salaried worker. This compensates for the loss of employment rights and is driven by free market forces.
#3: Government and HMRC are misrepresenting the law on employment status
The government claims: “The off-payroll working rules are designed to ensure that individuals pay broadly the same Income Tax and National Insurance contributions (NICs) as regular employees, regardless of the structure they work through.”
This stance sounds credible but has no basis in employment case law, which at no point states that if two people do the same type of work, then they should pay the same tax.
Employment status case law is vastly complex and it is inconceivable that HMRC can educate 5.7 million small businesses about how to assess status with any accuracy or certainty. HMRC has been defeated in 90% of IR35 tribunal cases over the past decade and to put status assessment at the heart of the taxation system for flexible workers is a gross error of judgement.
#4: Government research indicates that public sector costs have risen by at least 10%, following the reform
There is substantial evidence that contract rates and, therefore, costs to deliver public services, have increased following the public sector reform.
Research undertaken by IFF Research and commissioned by HMRC reported rates had risen in 28% of cases. With public budgets fixed, this results in an effective decrease in public services. The same study also indicates that costs/rates increased by at least 10%. Market surveys have returned similar findings, yet the Treasury refuses to acknowledge this.
#5: Projects were damaged as contractors left the public sector and refused to be misclassified
The government’s own independent IFF research report confirmed that 32% of central bodies had reported struggles in filling contractor vacancies.
In addition, 70% of recruiters reported to APSCo a reduction in public sector contract placements, while 49% of contractors told Harvey Nash that they were exclusively seeking work in the private sector, following the public sector changes.
#6: Claims of success in the public sector are premature – tax receipts are unknown until mid-2019 and off-sets could wipe out all gains
HMRC’s claims of success are entirely premature. It’s impossible to know the tax impact until a full tax compliance cycle has been completed, and the necessary figures won’t all become available until the middle of 2019. It’s feasible that both tax refunds and tax avoidance could wipe out all gains and result in a loss. If rolled out to the private sector, that loss could be in the billions.
#7: Blanket ‘inside IR35’ assessments are rife
Claims by the government that the genuinely self-employed have not been affected by the off-payroll tax, and that everyone is assessed on a case-by-case basis, are unsupported. There has been widespread non-compliance among hiring organisations by way of unlawful blanket status assessments and, in some instances, no assessment whatsoever.
The Freelancer and Contractor Services Association (FCSA) found that 50% of public sector bodies hadn’t conducted IR35 assessments for contractors, while 26% had applied blanket rulings. This fuels non-compliance among contractors and could result in thousands of tax reclaims over the next few years, and ongoing.
#8: HMRC’s Check Employment Status for Tax (CEST) tool is a failure
The government’s CEST tool does not align with the law, does not provide tax certainty and does not constitute ‘reasonable care’. HMRC’s testing and subsequent research prove that it is inaccurate and heavily biased. Claims that it provides an answer in 85% of cases are meaningless if individual answers aren’t accurate.
#9: Being classed as an employee without employment rights is perverse and contrary to the government’s ‘Good Work Plan’
The off-payroll rules seek to reclaim the avoided employer’s NI by allowing firms to classify workers as ‘employed for tax purposes only’ while denying them employment rights. This behaviour directly opposes the intentions of the government’s ‘Good Work Plan’, designed to prevent unscrupulous firms forcing vulnerable workers into precarious work.
#10: There is no appeals process if assessed incorrectly
Though the initial HMRC proposals for the off-payroll tax promised an appeals process, none was delivered. Incorrectly taxed workers have no way of obtaining a refund to ensure they have paid the correct amount of tax.
However, HMRC can step in and override someone’s status where it believes the individual is paying too little tax, the worker has no right of appeal. The only route they have is to sue their client, which is entirely impractical.