Several major accountancy and tax bodies have highlighted problems with the government’s plans to roll out its off-payroll working rules (IR35) to the private sector and called for a delay of at least a year to the regulations.
Issues raised by the ACCA, the CIOT and the ICAEW include the complexity of the arrangements, the lack of adequate lead time given before the changes are implemented, and the accuracy of CEST assessment tool used by businesses and workers to check the employment status of their engagement.
The government is proposing to change the tax treatment of off-payroll work in the private sector from April 2020, bringing the rules into line with the changes implemented in the public sector in April 2017.
However, responses to HMRC’s off-payroll working rules from April 2020 consultation, which has recently closed, have provided the government with plenty of food for thought.
April 2020 ‘too soon’
Via an official submission to the consultation, the ICAEW raised a number of concerns about the current proposals that if not properly addressed could perpetuate the current uncertainty around off-payroll working rules. Its major points included:
- That April 2020 was too soon for the changes to be implemented. Due to the fact that engagers will require at least 12 months to amend the systems that pay contractor invoices, adequate lead time will be needed if off-payrolling changes are made in the private sector. The body recommended that if the government should decide to push ahead with the new regulations, go-live should not be before April 2021.
- That while the exemption for small companies engaging contractors is welcome as an interim measure, the definition of small was too complicated and the carve-out was not an appropriate long-term solution. Having different tax rules for the public and private sectors is unsustainable, added the Institute, leading to greater complexity, unfairness, a greater administrative burden and the likelihood of more mistakes and ultimately non-compliance.
- As currently proposed in the consultation document, the transfer of tax liabilities is likely to produce unfair results. An example in the consultation document proposes that the liability should move down the chain as each party fulfils its obligations, with the liability ultimately resting with the end client if other parties fail. The ICAEW is concerned that this approach could result in an innocent party having an unexpected tax liability.
- There needs to be a real-time, independent statutory method of appeal against a tax status decision.
Complex and confusing
In its official response, the ACCA called on the government to delay any rule changes and give contractors certainty over their tax status.
In a press release accompanying its response, the ACCA warned that any change in tax legislation could lead to added confusion over employment status and harm the contract employment market at a critical point for the UK’s economy.
Lilly Aaron, ACCA’s policy manager – Europe, urged for a delayed introduction of the legislation until 2021, to allow a full appraisal of the proposed rules and consider the best way forward.
“On the surface, this legislation aims to tackle contrived working practices that may disguise the true nature of the relationship between a worker and client,” said Aaron. “In practice, however, this reform could create a complex web of new rules and liabilities throughout supply chains causing confusion over employment status and where tax liabilities rest.”
Aaron added that there were still a number of lessons to be learned from the public sector rules introduced two years ago, and at a time when many private businesses were busy planning for compliance shocks such as Brexit, a hasty move could have significant economic costs.
CEST tool needs ‘significant improvement’
In its official response, the CIOT specifically highlighted that HMRC’s Check Employment Status for Tax (CEST) tool needs to be significantly improved if the rollout of the off-payroll working rules to the private sector is not to lead to uncertainty and protracted disputes over tax status between businesses and workers.
The CEST tool was launched in April 2017 to help businesses and workers decide the employment status of their engagement but has come under constant fire from contractor and industry bodies who feel it is not fit for purpose.
The CIOT’s submission warned that CEST does not factor in all the criteria established by case law as needing to be considered before its algorithms reach a decision on whether IR35 applies. Consequently, it does not always give an accurate employment status determination, and this does not instil confidence in those relying on CEST to help with status decisions.
This latest criticism comes in the wake of a number of tribunal cases on the off-payroll working rules which won by the taxpayer and an acceptance by HMRC that the CEST tool only provides a determination in 85% of cases.
The body highlighted first tier tribunal decisions such as Albatel (Lorraine Kelly), MDCM, Jensal Software and Atholl House Productions (Kaye Adams) as examples of where HMRC’s views as to employment status have not been upheld.
These cases flag an important issue with CEST, which is that if the output from the tool does not reflect the decisions made by the courts (and, in particular, if CEST returns ‘false positives’ in such cases), this will not instil confidence to those relying on CEST to help with status decisions. And, ultimately, this will increase the number of cases where status is ‘in dispute’.
Commenting on the submission, Colin Ben-Nathan, chair of CIOT’s employment taxes sub-committee, said: “If businesses are to make the correct decisions on whether the off-payroll rules apply then we think that the existing CEST will need to be significantly improved. And we also think that the improved version will need to be ready by October 2019 at the latest so that new and existing contracts can be reviewed by April 2020.