Organisations including the ICAEW have called into question several key aspects of the off-payroll reforms for the public sector, before an expected move to roll them out to the private sector in the Autumn Budget.
In a letter to the Financial Secretary to the Treasury, the ICAEW stated that HMRC’s check employment status tool (CEST) was not suitable for use in the private sector.
This follows up an admission from HMRC that it has no detailed proof to demonstrate that the tool is accurate following a series of Freedom of Information (FOI) requests as part of a five-month investigation by contractor website ContractorCalculator.
In a separate letter, the ICAEW has also written to HMRC to call for clarity on the accounting treatment of IR35.
Tool ‘does not cover all scenarios’
Following the introduction in Finance Act 2017 of new rules for taxing workers’ services provided to public sector bodies (PSB) through intermediaries, where IR35 applies, the responsibility for deducting and paying PAYE and class 1 national insurance contributions (NIC) rests with the PSB.
The Check Employment Status of Tax (CEST tool) forms a key part of the procedure public sector bodies should follow to determine whether IR35 applies to an engagement.
However, after a number of FOIs HMRC stated that it holds no detailed test data on which the tool is based. “The CEST tool testing was done by a workshop,” an HMRC spokesperson told ContractorCalculator, “the only documented output of the workshops is the set of rules used by the tool.
“Our records show that HMRC has used the CEST tool to test all the cases cited in your request, but we do not have a record of how each question was answered as part of the testing, only the end determination.”
In a letter to Financial Secretary to the Treasury Mel Stride, the ICAEW stated that following the changes to the off payrolling regime for the public sector made in April 2017, the body has identified a number of problems which need to be resolved before any similar change can be considered for the private sector.
These include the CEST tool, which the accounting body believes is currently “not suitable for use in the private sector”.
“HMRC has stated that CEST does not cover all scenarios, including the mutuality of obligations master and servant test, and that the tool was designed based on public sector contracts,” the letter continued. “Further, there are also no rights of appeal for individual workers who disagree with the CEST status decision.”
HMRC has previously argued that the public sector changes have seen a rise in compliance, and are doing the job that the FA 2017 legislation set out to do in clamping down on disguised self-employment.
Last October a Revenue spokesperson told AccountingWEB: “We do not oblige anyone to use the tool but we stand by its results where correct information has been inputted in line with the guidance. If incorrect information is inputted, the results will be skewed but that has nothing to do with the reliability of the tool.”
In a separate letter, the ICAEW wrote to HMRC to call for clarity on the accounting treatment of IR35 applied to public sector contracts, before the predicted consultation on rolling out the off-payroll reforms to the private sector at the Autumn Budget.
The accounting body’s letter included questions about the accounting treatment of the contract fee in the personal service company (PSC)’s accounts, and also the treatment of corporation tax and VAT.
“At the moment there is uncertainty around how to account for the [contract] fee that is invoiced to the public sector body (PSB) because we’ve got FRS 102 and the Companies Act to comply with,” Sarah Ghaffari, the ICAEW’s technical manager (SME business tax) told AccountingWEB.
“Currently, it doesn’t seem there’s an agreed way forward in terms of whether revenue should be shown as gross or net of PAYE and employee’s national insurance, that the PSB is now liable to pay on behalf of the PSC.”
The lack of clarity around this matter is particularly concerning, according to the ICAEW’s letter, given that the government is rumoured to be consulting on the extension of the off-payroll rules to the private sector, where the numbers affected will be increased significantly.
PSCs with April year ends will also soon begin the process of preparing their accounts and may struggle with the current ambiguities of the system.
Even if the accounting issue is rectified, according to Ghaffari the way the tax legislation is written means that tax relief can only be given for the amount of deemed payment in the PSC.
“This will result in a notional profit hanging around in the PSC,” said Ghaffari, “because if they’re showing turnover of, for example, £10,000 being the gross figure they’ve invoiced the PSB, the PSC must show revenue of £10,000 but it doesn’t actually receive that because the PSB has deducted PAYE and NI.
“So let’s say the PSC receives cash of £7,500. Assuming there are no other costs, the owner takes that £7,500 out of the company as their remuneration. However, the PSC shows revenue of £10,000 there will be £2,500 hanging around in the accounts. That was never an amount received, as that is the tax paid on behalf of the individual, but that sum of £2,500 will be a notional profit in the company and CT will be due on the gross figure. And, of course, there will be no cash available in the company to pay that corporation tax.”
The ICAEW’s letter states that the body believes the tax legislation needs to be amended to allow a corporation tax offset for the full amount recorded as turnover.
The ICAEW’s correspondence also calls for the ambiguity around the VAT treatment of the contract fee to be resolved.
Currently, the PSC is liable for VAT on the gross figure reported as its turnover, despite only the net amount (after PAYE deductions) being received. The PSB claims input VAT on the gross figure as this represents its cost. As a result, many small businesses are left with a VAT underpayment on their VAT account due to an anomaly in the tax and accounting rules.
Issues need to be ironed out
The inconsistencies outlined above have been raised with HMRC in a two-hour meeting between the ICAEW’s tax faculty and the Revenue before the letter was sent, with the various scenarios outlined.
According to Ghaffari HMRC is already in conversation with the Financial Reporting Council on the matter, but at the moment have not resolved the issue.