HMRC has suggested three ways to improve compliance with IR35 in the private sector, none of which will be easy for contractors or their clients to comply with, writes Rebecca Cave.
Unconscious bias
The consultation is titled: Off-payroll working in the private sector. I feel the term “off-payroll working” implies that the correct tax treatment is to always pay the freelance worker through the payroll, which is certainly not true. Is this a case of unconscious bias by HMRC?
HMRC has also provided an IR35 factsheet which seeks to debunk some of the rumours about the IR35 rules which have applied for public sector contracts since April 2017. One of those “facts” is that its check employment status tool (CEST) has been rigorously tested in conjunction with HMRC lawyers against live and settled cases, and reflects employment status case law.
This is a half-truth at best, as independent checking of CEST by Chartergates legal services and ContractorCalculator has found that the tool does not take account of the test of mutuality of obligation (MOO). This is a vital test of self-employment, as was demonstrated by a recent IR35 win for an IT contractor over HMRC.
Whinge city
HMRC justifies changing the way in which the IR35 rules are applied in the private sector because it is time-consuming and expensive for it to investigate IR35 disputes. This, HMRC claims, is largely because every personal service company (PSC) must be investigated independently.
I have always believed that every taxpayer has the right to be considered individually by HMRC, and is thus required to pay tax based on their own circumstances, not according to some blanket categorisation.
HMRC also whinges that the complex supply chains involving multiple agencies means that it finds it hard to collect information from every organisation involved in the contract, and some of those agencies are not always cooperative.
Finally, HMRC complains that when it does win a case and demands back taxes plus interest and penalties, the PSC simply closes down, and the individual worker starts trading through another company. The consultation omits to explain that HMRC has the power to collect the unpaid PAYE, NIC and penalties from the directors in cases where the PSC is forced into liquidation due to deliberate errors or misstatements provided by the directors.
What’s off the table
The consultation is very clear that the underlying rules for establishing employment status will not be changed, and although the Taylor Review has made some suggestions in this area, those are not taken account of in this consultation.
In addition, the following ideas which have been put forward in the past as potential solutions to the IR35 “problem”, are dismissed as being outside the scope of the consultation:
- Employment status tied to a minimum length of the engagement – with short-term engagements (not specified how short) never classified as employments.
- A new structure called freelancer limited company – this was suggested by IPSE in 2014 and considered by the OTS in its small company taxation review in 2016.
- Client tests the employment status of the worker, and if the relationship is employment pays the employer NIC (as under current public sector rules), but the worker would not be subject to PAYE (contrary to current public sector rules).
- Client withholds tax from the contractor in a similar fashion to CIS deductions – this is a particularly bad idea, as Howard Royse has argued.
Extending public sector rules
This appears to be the favoured option for HMRC, as it believes the tweaked IR35 rules have worked well so far in the public sector.
Moving responsibility for assessing employment status onto the end client means the client will have to rely on CEST to provide an answer in the majority of cases. The consultation is asking for suggestions on how the public sector IR35 rules should be adjusted to work in the private sector.
David Kirk, an expert on IR35 and employment status, made the following points on the extension of the public sector IR35 rules to private sector contracts:
- There is a distinct lack of public confidence in CEST, which will continue as long as it produces results visibly at variance with what case law would suggest. The most recent case that HMRC have lost (Jensal Technology) was lost on this issue - and in the public sector too.
- All parties to the contract will have to rely on HMRC guidance on how to account for the tax payments by the client on behalf of the PSC under PAYE. The current HMRC guidance on the public sector rules appears to contravene both the Companies Act 2006 definition of turnover and the FRS 102 definition of revenue. Correcting these points will require a change in the law, which needs to accompany any other changes to IR35.
- There is also serious lack of public confidence in HMRC's policing of IR35, which will not be restored as long as they keep on losing cases in the tax tribunal. So far they have lost two cases out of three this year, six cases out of eight since the new tribunal system arrived in 2009, and 12 out of 24 since IR35 came into being in 2000. A record like this suggests that some of the increased compliance that HMRC has noted in the public sector is likely to have come from incorrect categorisation, resulting from misunderstanding of the legal tests.
- In the private sector, this poor record will encourage those engaging workers to challenge HMRC aggressively in the courts. Less knowledgeable businesses will simply do what they have done in the public sector, which is to shift non-compliance to offshore umbrella companies that HMRC does not have the resources or the legislation to tackle properly.
Secure labour supply chains
An alternative approach suggested by HMRC is to require businesses to audit their labour supply chains, to ensure that all freelancers are complying with the IR35 rules correctly. There is already HMRC guidance on how to undertake due diligence checking on labour supply chains, and HMRC believe that some of these checks could be adapted to the IR35 rules, for example:
David Kirk commented: “These audit requirements would add a complex layer of bureaucracy and would be very unlikely to work in an environment where non-compliance is endemic.”
Additional record keeping
A third alternative approach is to require engagers to keep more records about the contractors they engage, such as copies of contracts, shift rotas, and line management reporting relating to the engagement. If this information was retained, HMRC would be able to quickly gather what it needs directly from the engager should it later open an enquiry into one or more contractors or PSCs.
David Kirk also believes that this level of record keeping simply would not happen in a business that has no other need to keep the information, and where the people who would need to collate it are far removed from the accounting/ tax function. He commented, “compliance officers will never be able to keep up with this, even assuming that they are themselves aware of the issue in the first place.”
Next stage
This is a stage 1 consultation, and as such it focuses on policy design rather than practical aspects of regulation. The “how to” stage will be fleshed out with draft legislation, likely to be released this Autumn, with a view to passing the law in time for implementation from 6 April 2019.
However, if enough respondents emphasis that a longer lead time is needed in order for businesses to properly prepare, and for systems to be changed and tested, the implementation could be pushed back to 2020.
How to respond
HMRC will be conducting roundtable discussions on the issues raises in this consultation with representative bodies, so if your professional body has not been invited to such a discussion ask them why.
You can respond individually by email to: [email protected] or post your comments below and we will make a response on behalf of the whole AccountingWEB community.
Replies (25)
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Worrying aspects of HMRCs document are:
(1) It pitches empirical based evidence that does not align with its agenda as "rumours"
(2) They still claim CEST is accurate, despite having no paper trial proving those claims, and despite admitting it omits key case law.
(3) The £410m figure used for a success claim is one part of an equation that has many variables, which won't surface until after Jan 2019
(4) They deny the widespread evidence of blanket assessments.
(5) They claim 90% of those who should operate IR35, don't - yet they lose half the cases in court. For them it should be like shooting fish in a barrel.
What's crystal clear is that asking firms to assess employment status for each hire is like asking them to solve the enimga code. And if they hold the bargaining power then making risk averse decisions to blanket inside IR35 is what they will do, and are doing.
This wouldn't happen in the private sector, and we will have a repeat of 2000 again. Those with barginaing power, who typically earn more, will negotiate contracts outside IR35. Firms trying to blanket won't fill positions or will find themselves hiring weaker talent.
But for the lower paid who don't have bargaining power they will get a raw deal, namely assessed as an "employed for tax purposes" but will not get any rights. An open ticket for corporations to abuse the system even more as the expense of the worker.
So much for the Tories "Good Work Plan".
HMRC have been tasked with 'maximise revenues'. It is number one on the new published strategic objectives on their website:https://www.gov.uk/government/organisations/hm-revenue-customs/about
Therefore, everything else is secondary.
This is a largely a pretence at a 'consultation', the end result is already pre-determined, they are just checking the objections to how they get there.
The fundamental problem to me is it is simply not possible to determine in a binary way if a contract falls inside or outside of IR35.
HMRC act as if this was not an problem, when it is the main part of the issue.
Flipping the problem round to be the engagers problem doesn't solve the problem, indeed the contractor is probably better equipped to establish the answer than anyone given they live and breathe the contract.
Having read the consultation document, the biggest problem to me is that it's loaded. The wording is deliberately crafted to get the result that HMRC wants, and anything that may stray from that is "Outside of the scope" of the consultation.
A right royal stitch up, IMO.
Alas I agree. I find a lot of hmrc material is now spun. Like the DOTAS case press release last year that misleading implied hmrc had won the substantive issue when in fact they had done no such thing. Or the current condoc on offshore time limits; offshore being a considerably more emotive word than foreign and conjuring up images of tax havens and not Germany or the States for example.
"the following ideas which have been put forward in the past "
But not the obvious idea. If you hire an employee you get an employee under employment law - no matter how many middlemen are in the way.
If a contractor is genuinely in the 'talent' economy, then they will simple increase their charge and the client will pay it - and the taxation.
The rest will be employees, covered by employment law - as they should be.
The root cause of the issue is employment avoidance by large firms - and the rise of middlemen making a packet enabling that avoidance (so called 'employment businesses'). And that falls outside the remit of HMRC.
We need to ban 'employment business' as a category (forcing all of them to act as 'employment agent'). That still allows them to act as outsourced payroll agent if the hirer wants that.
When I was lobbying over the agency legislation years ago, there was a bizarre attitude in the Department of Employment that being employed by a temp agency was preferable than the temp agency acting as agent for the hirer.
A very odd attitude given that they would have been employed by the hirer if the hirer had used small ads or a website to find the employee instead of a large agency.
Which is harder to deal with IR35 or Brexit?
Is dividend tax and no flat rate vat not enough?
The big issue is timing. Many IR35 cases revolvearound 2 aspects how the engagement is set up (so with a compliant contract for example) but then how that operates in practice which may not be compliant as people go to staff meetings have their leave applications turned down or appear at the staff party. So "on thr facts" their compliant contract is not worth anything. The same will happen with any new system
is this private or public sector. the heading says public?
It is stated policy of 'the big 4' consultancies to get as many of their employee 'consultants' in to work on client sites - so as to reduce their office space overhead.
I see no difference between a '[***]-on-seat' supplied by one of the big 4 in this manner to a '[***]-on-seat' through any other agency.
In a meeting a few months back I tackled an HMRC bigwig on this and he said "That's not the way it works with them".When asked how so he responded "They told us so".
Anyway, as elsewhere stated,
... this is not a consultation it is a [sadly now standard] charade
... the so called 'facts sheet' is just too conveniently slanted
... their claims around the 'accuracy' of CEST is, charitably, a tissue of lies
... they avidly choose to avoid tackling the fundamental mis-fit between tax policy [largely of HMRC's making as politicians know nothing and ask for 'advice'] and the real world
It is simply not fair to tax individuals as employees when they get none of the benefits of being an employee.
new petition to give IR35 caught contractors employee rights -
https://petition.parliament.uk/petitions/228307
HMRC got their fair share of tax from contractors after they changed the dividend tax regime in April 2016. As many of us have pointed out, the taxes paid by employees and those paid by contractor using limited companies is pretty much on a par. To use HMRC words "broadly the same".
To say contractors are avoiding tax is untrue. The tax that is now avoided is "Employers NI", which is a "Payroll Tax" in all but name, and is paid by (clue is in the name) the employer.
It seems obvious to me that if firms are avoiding paying the Payroll Tax by pushing people off the payroll, then the simple solution is to slowly/incrementally introduce an Off-Payroll Tax, payable by the current tax avoiders - the corporations.
Maybe we could use that to fund the NHS, rather then wrongly overtaxing the NHS locums to fund the NHS.
Tom 7000 has hit he nail on the head. HmRC have already solved most of the problem and the rest is hubris - they don't like losing face.
The Government probably don't understand this as they seem to have little understanding of matters financial. So more time and money that could be better spent elsewhere will be thrown at it without ever getting a satisfactory answer. It's called progress!
Many public sector bodies - NHS/Police - are extending the off payroll criteria to the self employed not just limited companies, so outside IR35. Is this by statute and if so where is it?
How exactly are they "extending" this to sole traders. The legislation is designed for PSCs, not sole traders.
I agree but I have clients who are sole traders who have had tax and NIC deducted from their invoices to public sector bodies who don’t seem to understand the difference between PSC and sole trader. They claim the rules apply to all off payroll workers.
yes this happens in say the education sector when all payments are put through payroll not much can be done about this , they are usually when recurring events are taxed
But if it’s wrong, something should be done. Sole trader invoices should be treated the same as other suppliers not employees.
Section 3.3 of the consultation document says:
"3.3. However, people who provide their labour through their own company also pay less tax than either the self-employed or employees. In many instances this is
correct and legitimate. However this can effectively mean that two people doing the same job, in the same way, can end up paying very different levels of income tax and NICs depending on how they are engaged.... "
I do not believe this to be accurate. A person working through a PSC and drawing all their income as salary will pay exactly the same tax and NIC as a person employed by a client. The difference is that the fee charged by the PSC will have to be higher than the gross salary of the employed person, because the PSC will need to account for employer's NIC and Auto Enrolment pension contributions out of the fee charged.
https://www.taxjournal.com/articles/payroll-working-private-sector-31052...
Is anyone out there in Newark, Nottinghamshire, a constituent of Robert Jenrick MP, who is currently Exchequer Secretary to the Treasury, please? He appears on webpage : https://www.gov.uk/government/people/robert-jenrick to me to be currently responsible for IR35, because I read
QUOTE
The Exchequer Secretary (XST) is responsible for:
** UK growth and productivity:
* Industrial Strategy
* infrastructure delivery
* regional devolution, City deals, Northern Powerhouse and Midlands Engine
* promoting UK as a destination for FDI (non-FS)
* better regulation and competition policy
* energy, environment and climate policy
* Patient Capital Review implementation
* National Infrastructure Commission
* Infrastructure and Projects Authority (IPA, joint with Cabinet Office)
* Public- Private Partnerships (PPPs) and Private Finance Initiatives (PFI/PFI2)
AND
** the following indirect taxes (supporting FST as lead tax Minister):
* excise duties (alcohol, tobacco and gambling), including excise fraud and law enforcement
* soft drink industry levy
* environment and transport taxation, North Sea oil, gas and shipping
** Corporate Governance
** National Insurance Bill [ ? includes IR35, surely ?]
** charities, the voluntary sector and gift aid
** supporting tax legislation in Parliament [ ? includes IR35, surely ?]
** Crown Estate and the Royal Household
** Royal Mint
** departmental minister for HM Treasury Group.
ENDQUOTE
IR35-AWeb regulars may remember that I took a dim view when a previous XST “refused to attend an oral evidence session” in Parliament on IR35 and PSCs, as publicly reported on, for example, page number 8, para 10, of the House of Lords Select Committee Report HL Paper 160 published 7 April 2014 on webpage : https://publications.parliament.uk/pa/ld201314/ldselect/ldpersonal/160/1...
If the body using the contractor accepted an obvious self employed contract (much like an accountant's or solicitor's contract with his or her client) and stuck by it, IR35 would not be an issue. Abolish IR35 and what is to stop every senior executive (other than owner / managers who take dividends) in the country operating through a company and so getting a 13.8% pay rise in place of the employer's NIC?
Abolish all NI add 7% to basic rate tax.
Set an income limit to gain pension and benefits credit
Put feet up job done
Nothing afaics - and, in law, why shouldn't they.
You eloquently underscore one of the stupidities of the current Payroll Taxes on employment.
Frankly I think the 13.8% will be better spent by the individuals, contribute to greater downstream tax payments in the long run AND also therefore not be frittered away by spendthrift HMG departments that depend on my bottomless pocket.