HMRC recently announced its long-awaited consultation on extending off-payroll working reform to the private sector. Here’s what contractors need to know.
IR35 was introduced in 2000 and is designed to tackle tax avoidance, by establishing whether people who are self-employed should actually be classed as employees for the purposes of paying tax.
HMRC introduced controversial IR35 rules for the public sector in April 2017. Instead of the contractor having responsibility for determining their employment status, the client or hirer now needs to make the call. They would be liable for any missing tax if they got the decision wrong.
We previously said that IR35 reform could be coming sooner than you think. Now, HMRC has launched its long-awaited consultation on ‘off-payroll working in the private sector.’ To help get you up to speed, here are seven key points.
HMRC says its “lead option” for tackling IR35 non-compliance is extending its controversial public sector reform to the private sector.
HMRC does list two other options it’s considering – a record-keeping regime and a supply chain checks and assurances system. But there isn't as much detail on how these might work compared to its preferred proposal.
There are other solutions HMRC sees as ‘out of scope’ entirely. These include the Freelancer Limited Company, minimum contract lengths, and clients paying employer NICs.
The wording has led some experts to read between the lines. Employment status specialist David Kirk, speaking to ContractorUK, said: “If this means that the only solution actually is to rollout the public sector reforms to the private sector, I fear for the future. They do really need to be more imaginative.”
Even though extending public sector reform is the tax service’s preferred choice, controversy surrounds how effective it's actually been.
HMRC says that teething problems have largely been sorted, with compliance improving. But industry body the FCSA (Freelancer and Contractor Service Association) argues that HMRC’s claims shouldn’t be seen as proof that reform has worked.
Disputing HMRC’s evidence that 58,000 more public sector workers have paid income tax and NICs since April, the FCSA said: “all that we have seen is an increase in numbers on-payroll, which is not substantive proof that they should be there at all.”
Why? Some public sector clients and engagers, finding it difficult to assess status properly, may be making ‘blanket’ decisions. Such decisions could bring many inside IR35 inaccurately.
An FCSA survey revealed that 26 per cent of public authorities carried out ‘role-based’ instead of individual IR35 assessments. If true, they would be non-compliant – IR35 status needs to be determined case-by-case.
Advisory firm Qdos urged that plans should be put on hold until public sector clients and hirers show they can make accurate IR35 decisions on a large scale.
In terms of its tax yield, HMRC says it’s raised £410 million in income tax and NICs. But we’ll need to wait until the January 2019 tax return for a full assessment, when the figure can be looked at alongside Corporation Tax and Dividend Tax payments.
The timing of the consultation isn’t ideal for HMRC – it launched just a day after it was revealed they’d lost an IR35 case.
IT contractor Ian Wells successfully fought a £27,000-plus tax bill. What’s interesting is it’s the second time Wells has beaten HMRC at tribunal (his first victory was in 2004).
Since 2000, HMRC has won 12 IR35 cases, but taxpayers have won 12 too – so HMRC’s record is patchy.
The FCSA said: “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.”
The 2017 Taylor Review of modern working practices looked into whether the current framework for determining employment status is suited to the changing definition of ‘self-employed’. It gave special consideration to those in the gig economy, where technology has blurred the lines between employee and contractor.
Although HMRC admits that “the interaction between the employment status tests for employment rights and tax is an important and complex issue”, they say that employment rights issues are outside the scope of the consultation.
But Dave Chaplin, CEO of Contractor Calculator, said: “the only way that a remotely fair tax system can be achieved is by aligning tax and employment status.”
He says one reason for this is that employers could force people into self-employed status to avoid giving employment benefits.
The tool that clients and hirers can use to assess someone’s employment status, CEST (Check Employment Status for Tax), has had a mixed response.
HMRC says that CEST allows public authorities to make ‘quick and easy assessments’. But Dave Chaplin said that there’s no certainty these quick and easy assessments are reaching accurate decisions: “CEST may be making hirers’ lives easier, but it is not promoting compliance with IR35.”
Specifically, while HMRC claims CEST reflects case law, it doesn’t take ‘mutuality of obligation’ (MOO) into account. This is because HMRC believes that all contractors are subject to MOO, a piece of employment law referring to an employer’s obligation to provide work and pay for it, and an employee’s obligation to personally do the work.
In the IR35 court case mentioned in point three, Judge Jennifer Dean called HMRC’s interpretation of MOO into question. She said that while there was MOO, it didn’t mean the working relationship was one of employment.
Critics say that by ignoring the nuances of employment law, CEST continues to be an inaccurate tool.
In figures called ‘disappointing’ by Meg Hillier MP, 4.3 million phone calls to the tax service went unanswered last year.
HMRC’s statistics also showed that 14 per cent of calls took them more than 10 minutes to answer.
Referring to IR35 reform, contractor body IPSE said: “these problems are only going to get worse if the government continues to introduce more complex and more burdensome legislation which affects the self-employed.”
Although HMRC firmly sets out its “lead option”, it asks 12 questions about how public sector reform could be better applied to the private sector.
And there are 34 questions throughout the entire document, seeking alternative views on how to ‘vary’, ‘adjust’ or ‘improve’ the rules.
Employment status expert David Kirk said: “this reads more like a cry for help than a consultation document.”
Take a look at the consultation document yourself and see what you think.
It runs from 18 May to 10 August and it’s easy to respond and to ask questions. You can email [email protected] or reply by post to IPD Employment Status and Intermediaries Policy, Room 3/46, 100 Parliament Street, London. SW1A 2BQ.
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