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Private Sector IR35 Reform Consultation Released

IR35 reform for all: Consultation on off-payroll working in the private sector

What is wrong with this assessment of Jemima’s employment status?

"A manufacturing firm need someone to maintain and update the new website. They hire Jemima to work for three days’ a week, eight hours each day. The firm provides Jemima with a laptop so she can work at their offices, or at home with their permission. She reports to the head of the firm’s IT department, and must follow their style guide and format to update the website. The firm is responsible for providing and updating the software Jemima needs to do her work. If Jemima has to work longer than her contracted hours, she will be paid overtime. Jemima will be able to work elsewhere on the days she is not working at the firm, with their agreement."

To start with, there is no mention of personal service or mutuality of obligation and control is superficial. Yet, HMRC would have you believe that this scenario is one of employment and highlights their deliberate narrow-mindedness when it comes to the issue of status.

The above illustration appears in a factsheet that accompanies the much anticipated consultation document, ‘Off-payroll working in the private sector’.

The consultation sets out the case for extending the public sector off-payroll rules to the private sector and, whilst some other alternatives are suggested, it is clear that HMRC want this to happen as quickly as possible. A short consultation period ending on 10th August 2018 bears this out. HMRC’s argument for rolling out the rules to the private sector are based on flimsy evidence, if we can call it that, whereby the department estimates that only 10% of PSCs that should apply the IR35 legislation actually do so. Furthermore, HMRC calculate that the cost of ‘non-compliance’ in the private sector is on the increase, projected to rise from £700 million in 2017/18 to £1.2 billion in 2022/23.

It’s working in the public sector

Low and behold the off-payroll rules introduced to the public sector last year have been a success, say HMRC, but let’s face it they were always going to have the desired effect because much of the sector is a closed shop.

HMRC has analysed PAYE data covering the first 10 months of the reform i.e. April 2017 to February 2018, which apparently shows that, in any given month, there are an estimated 58,000 extra individuals being put through the payroll. As a result, it is estimated that an extra £410 million in income tax and NIC receipts has been raised.

The Revenue freely admit that the rules have done the job for them but more sinister and more telling is their boast that they are able to approach a public sector organisation in order to obtain information on a large number of PSCs at once and thereby open a single enquiry covering multiple workers engaged by that end client. IR35 requires each individual workers’ engagement to be considered on its own merits but HMRC want to ignore this and simply take a very broad-brush approach to IR35 compliance.

One of the reasons for more workers being shoved onto the payroll is the fact that more and more public authorities have developed internal expertise to make status decisions without the need for external advice. Employment status isn’t something that someone can just swat up on and become an expert on overnight and it does make me wonder what qualifies these people to preside over a contractor’s fate.

Most public sector organisations default to CEST to help them make their decisions which apparently HMRC rigorously tested in conjunction with HMRC lawyers against live and settled cases and reflects employment status case law. That is just not true as we all know that CEST does not truly reflect case law accurately. Also, how can we trust HMRC’s legal eagles, the same people who allowed Jensal Software Ltd’s appeal to go all the way to tribunal when it was obvious to all and sundry that IR35 did not apply.

CEST has been used over 750,000 times and gives a 60:40% outcome in favour of self-employment. That gap concerns me because history tells us that, in most IR35 enquiries, HMRC lose.

Through HMRC providing technical advice to public sector bodies they have identified areas where they may wish to make adjustments going forward and the chances are that these will not be for the betterment of CEST.

What’s good for the goose

So, having convinced themselves, but not the rest of us, that the off-payroll rules are working and are the way forward, HMRC now want to impose these on the private sector.

IR35 advisors part of the problem

Those who offer freelancers advice on all aspects of IR35 and provide tax enquiry insurance are resented by HMRC. How dare we stand up to the department and offer contractors the best possible defence against IR35. Providing contract advice and insurance apparently lulls the unsuspecting contractor into a false sense of security and delays agreeing a settlement because the freelancer is able to rely upon their insurance covering costs of defending the case, expert representation and any tax, interest and penalties arising in the event of losing the IR35 argument (Tax Liability Cover).

HMRC clearly detest the fact that contractors are able to equip themselves with equal resources needed to match and fight the department, and are seething that they are unable to have it all their own way. They think they know best when, sorry to hark back to the Jensal Software case, they simply do not.

IR35 non-compliance in the private sector is endemic according to HMRC. What utter nonsense and where is the evidence to support such a wild claim? In finding a remedy to this fictional plague, the government believe that any effective solution should be efficient for HMRC to enforce, i.e. without the need for the Revenue to lift a finger, and not be disproportionately burdensome for end users, PSCs and agencies to administer. That’s just described CEST hasn’t it?

Alternatives to off-payroll rules

Whilst extending the public sector reforms to the private sector, after a bit of tweaking, is the government’s preferred choice, the consultation document offers up some half-hearted alternatives designed to convince us that the government are still open minded as to the ultimate solution.

Compliance through labour supply chains

Private sector businesses could be required to ensure that contractors are acting compliantly by carrying out certain checks such as:

  • making sure the labour supply chain is commercially sustainable so it can meet statutory tax obligations and make a profit.
  • checking the history of the labour supply business - if a previous business failed because it did not pay its tax debts, what changed to stop this happening again?
  • adding a clause in the contract requiring labour suppliers to show evidence of the PAYE returns filed and payments they have made to HMRC.
  • adding a clause in the contract requiring authorisation of further sub-contracting before any of the suppliers are sub-contracted to a third party labour provider.
  • adding a clause in the contract preventing the use of offshore intermediaries.
  • where workers supplied by agencies are being treated as self-employed, deciding if the agency rules apply.
  • ensuring the agency has complied with employment intermediary reporting requirements and has evidence of submitted reports to HMRC where they do not operate PAYE (this includes where they use an umbrella company).

In addition, end clients could be required to ask the PSC to provide a completed CEST determination and to check the outcome against the working practices of the individual carrying out the role in question.

The requirement could be underpinned by some form of penalty, or by denying the end user tax relief for the costs of using labour from a supply chain that they have not checked.

Alternatively, the checks could be optional, but end clients who have not performed them and are later found to have used a non-compliant labour supply chain could be named publicly, thereby risking reputational damage.

The public sector reform has encouraged public authorities to take steps towards securing their labour supply chains, demonstrated by public authorities advertising new roles with a clear indication of whether they consider the worker would be regarded as a pseudo employee.

HMRC recognise however that this would place a large administrative burden on businesses and don’t even appear to believe in this solution themselves!

Additional record keeping

Another option would be to require end users to retain certain information such as contracts, shift rotas, and line management reporting requirements relevant to the engagement. This would then allow HMRC to gather information from the end user more quickly and directly in the event of an enquiry into one or more PSCs. There’s that broad-brush approach again.

Anything else?

Whilst the government say they are open to suggestions that they have not considered, it is doubtful that they will be swayed because their mind seems to be made up. Having said that, it is up to us all to offer credible alternative solutions that they might just find appealing.

Non-starters

It has been made clear that options that were offered up in previous consultations on the off-payroll working rules are off the table from the outset. These include:

 

  • Minimum length of engagement – workers engaged for short periods of say less than one month would automatically be outside of IR35.

     

  • Freelancer Limited Company – a new corporate structure that offers simplified tax treatment, limited liability, a restriction on dividend frequency and a requirement on the worker to draw a minimum salary.

     

  • End client pays employer NIC – end user applies a particular test to the worker which, if found to apply, would require the end user to pay secondary NIC but the PSC would not be subject to PAYE tax or employees NIC.

     

  • Flat-rate withholding tax – similar to the Construction Industry Scheme, the end client would withhold a flat rate of tax and NIC which the PSC could set off against its final PAYE/NIC debt in the event IR35 was later found to apply or otherwise would be refunded to the PSC.

 

The government want to see tax simplification across the board. Having a two-tier system for IR35 therefore does not fit that bill, which is why they want to see IR35 fully morph into the off-payroll rules. Railroading the public sector into adopting them was the easy part but getting the private sector to lay down and die may prove a lot more difficult, especially if contractors, advisers, end clients and agencies alike, rally and oppose the jackboot of HMRC.

Responses to the consultation must be made by 10th August either by e-mail to offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk or by post to IPD Employment Status and Intermediaries Policy, Room 3/46, 100 Parliament Street, London SW1A 2BQ.

As usual, Qdos will be submitting their response to the consultation. For those who wish to have their voice heard but are nervous to speak directly with HMRC, please submit your responses to freelancer@qdoscontractor.com with the subject 'Private Sector Consultation Response' and we will include them anonymously within our submission. Please note that offensive content will not be accepted, please submit considered responses.

By:Andy Vessey - Head of Tax

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