Government rolls out off-payroll private sector consultation

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The government has launched a consultation to examine extending existing ‘off-payroll’ working rules to the private sector, triggering fears that the rollout could cause confusion for contractors and companies.

As announced at the Autumn Budget, the consultation has been published with the stated aim of tackling non-compliance with the off-payroll working rules (IR35) in the private sector.

The consultation will examine whether to apply the same legislation introduced for the public sector in April 2017 and will also look at the rules for engagement in the public sector.

The fundamental principles of the off-payroll working rules – that the employment status test determines who should be taxed as employees – are not being considered as part of the consultation.

HMRC also revealed that since last year’s crackdown on supposedly self-employed workers in the public sector, in any given month there were an estimated 58,000 extra individuals paying income tax and NICs. This has resulted in an additional £410m of income tax and NICs being paid since the public sector reforms were introduced.

A release accompanying the consultation added that there was evidence off-payroll workers not paying the right tax could be responsible for underpayments to the exchequer of up to £1.2bn by 2023.

The IR35 legislation was initially introduced in 2000 with the intention of discouraging people from leaving an employment on a Friday and returning to the same role but working through a personal service company, and thereby saving tax and NI for both the individual and the engager. However, HMRC estimates that the IR35 rules are only correctly applied in 10% of private sector cases.

The consultation comes a day after an IT contractor successfully won his appeal against HMRC on IR35.

The timescale of the new consultation means that any potential changes could still be introduced from April 2019, but given the stretched nature of HMRC’s resources, this seems unlikely at this point.

Increased revenue

David Williams-Richardson, employer solutions partner at accounting firm RSM commented that HMRC was determined to push ahead with this reform due to the increased revenue this will bring.

“There will undoubtedly be considerable opposition to these proposed reforms from companies in the private sector who would face significant additional administration costs, changes to systems and the need to assess risk management,” said Williams-Richardson.

“If experience with the public sector reforms are anything to go by, many personal service companies working for private sector businesses may find that the engager takes an ultra-cautious view and assumes that the engagement is caught resulting in National Insurance contributions and tax being withheld through PAYE.”

‘Fair tax system’

Speaking on the release of the consultation, Financial Secretary to the Treasury Mel Stride stated that that the government was not seeking to punish contractors by tightening tax rules for the self-employed.

“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy,” said Stride, “but it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services.”

Public sector reforms: Relatively little impact?

In spite of warnings that the public sector rules established in 2017 would lead to mass walkouts from public bodies, an HMRC spokesperson said that independent research showed that the reform “has had relatively little impact on projects or vacancy filling in the public sector”.

The research, conducted by IFF Research and Frontier Economics, look at staffing arrangements at ‘central bodies’ between March and August 2017. It concluded that although overall headcount levels had fallen, off-payroll workers made up a smaller proportion of workers after the new rules came into effect.

However, Chris Bryce, CEO of independent professionals’ body IPSE, stated that his organisation’s research suggested large numbers of contractors were walking away from the public sector, with a particularly bad effect on the NHS.

“It is shameful that the government did not publish the external research into the impacts of the public sector changes prior to announcing this consultation,” continued Bryce.

Contractor reaction

Leading voices in the contractor space greeted the news less than enthusiastically.

Julia Kermode, chief executive of freelancer association the FCSA, labelled HMRC’s track record on IR35 as ‘dismal’. “It is unthinkable that it can expect end-hirers to take responsibility for IR35 when it is proven that they cannot implement it properly themselves,” said Kermode.

“The reforms in the public sector have had a devastating impact ... HMRC has failed to communicate effectively with 50,000 public sector bodies so to roll the reforms out to 5.5 million private businesses in the UK will require a massive upscaling of current policy implementation which HMRC is simply not equipped to do. HMRC is already over-stretched and the public sector changes were not implemented properly.”

CEST tool

HMRC has recently come under fire after it emerged that public sector bodies are ignoring the results of the HMRC employment status tool CEST, and may have deducted incorrect amounts of tax and NI from contractors.

Dave Chaplin, CEO and founder of ContractorCalculator has been campaigning against the reforms and questioned whether HMRC can be expected or trusted to educate the private sector to assess the employment status of workers

“If CEST’s assessment figures are anything to go by, the taxman’s increased tax yield is merely a result of rising non-compliance – this time among hirers and agencies,” said Chaplin.

“If HMRC cannot effectively implement the legislation then asking end-hirers and agencies to assess IR35 status will be a massive error of judgement. Promoting CEST, a tool intended to support hirers, but which creates even more uncertainty instead, has only compounded the situation.”

 

The consultation on extending the reforms to the private sector is open until 10 August.

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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By mabzden
19th May 2018 16:47

I have a few public sector contractors who were affected by the new rules. One has taken a PAYE job, and the others have spent the last year or so either not working or working less than they wanted.

Personally I support contractors paying a bit more tax and/or NI. But forcing them to choose between unemployment and inflexible, high cost PAYE jobs doesn't seem the best way to proceed.

So, in my experience, the extra cash to Treasury coffers has come at a very high cost, both in terms of people's lives and valuable skills lost to the public sector.

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20th May 2018 14:22

The usual HMRC drivel, what is this now the sixth or seventh consultation on this?

They already get more tax from contractors. The changes to flat rate tax, plus dividend tax, have added over £10k to the annual tax bills of many of my clients.

This is the real story of the extra Government tax revenues of £8bn or so trumpeted by Hammond in the Autumn Statement. But of course "we've hammered small businesses for extra tax" is never going to make the cut on the fancy speeches. Better to use smoke and mirrors and claim that HMRC is wonderful.

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21st May 2018 10:25

“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy,” said Stride, “but it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services.” I wish I could comment on this most idiotic comment but can't find any polite words to use!
These are the morons governing the economy expecting it to flourish and Britain to be competitive!!!! Yes and I am the king of the world

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By NeilW
21st May 2018 11:08

The real scandal is the one that will not be addressed.

If a hirer hires an employee, they should get an employee in employment law - and no amount of intermediaries should change that.

Then the tax follows as a natural consequence.

HMRC have constantly failed to fix the root causes of the issue - employment avoidance by large businesses.

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21st May 2018 13:14

"It is interesting to note that the existence of MOO is not tested at all by the HMRC’s check employment status for tax tool (CEST), which public sector bodies are supposed to use to test whether a contract lies within IR35. HMRC states this is because MOO is assumed to always be present in public sector contracts, so there is no need to test for it."

from https://www.accountingweb.co.uk/tax/hmrc-policy/ir35-slam-dunk-win-for-c...

CEST cannot be used for private sector contracts as it stands as MOO cannot be assumed for these contracts.

Will HMRC rewrite CEST so that it actually does the job it is supposed to, including MOO, or will there another fudge brought in.

In my opinion it will be easy for all private sector contracts to confirm there is no MOO between the parties and therefore any such contract will be outside IR35.

I would like to see HMRC try to tell private companies that they heve to have assume MOO for such contracts

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21st May 2018 17:51

The consultation rather confusingly seems to deem sole traders as personal service companies (PSCs). It all sounded a bit muddle to me.

I suspect what might result is the requirement for lots of time consuming forms before private sector companies can place work with someone external which will burden both sides but not do much good.

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21st May 2018 19:18

The problem ever since IR35 was introduced is that the Government bottled making employers responsible for employers' National Insurance contributions, after heavy lobbying from big employers. As a result, employers (not contractors) have abused the system. Employers (like the BBC) have demanded that irregular contractors use personal service companies, to shield the employer from any risk. If both the employer and the contractor were responsible for their share of the tax and NI due then employers would work with contractors to ensure that the engagement was really for services, and that true employment was recognised. There would be no need for obtuse tests or uncertain rules.

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23rd May 2018 12:32

"This has resulted in an additional £410m of income tax and NICs being paid since the public sector reforms were introduced."

What is the figure net of Corporation and Dividend Tax?

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