Response to Off Payroll Working Consultation
The government’s formal consultation on off payroll working (IR35) in the private sector closed last month. Read our response submitted by Chris James, Head of Accounting at JSA and Chair of the Freelancer and Contractor Services Association.
The flexible workforce in the UK was acknowledged by the Taylor report into modern working as a key strength of UK Plc. This remains the case.
As the UK continues to deal with uncertainty and change, both inside and outside our borders, the need for an agile workforce, not working to the patterns and conventions familiar to ‘regular’ salaried employees is greater than ever.
IR35 and related taxation measures are imperfect. Change should be considered. However, not using the information already available to HMRC, and ploughing on when other connected issues are not resolved (employment status generally is under review) is foolhardy in the extreme.
In a country, and business community, facing uncertainty on almost every front, a decision to press ahead with these weakly-evidenced reforms now is a very bad one.
I welcome the opportunity to comment on the consultation document issued by HMRC and HMT on 5 March 2019, regarding the rolling out of reforms to off-payroll working already applied to the public sector, to the private sector in April 2020.
The business for which I work, JSA, is a fully accredited member of the FCSA (the Freelancer and Contractor Services Association). In my work with the FCSA I have contributed to their consultation response. In my role as Chairman of the FCSA, I would direct any reader to review the FCSA response.
There is no doubt that there are many reasons to believe the rules as they are do not work well enough in the private sector. However, this does not justify change for change’s sake.
- Timing – business
It will always be possible to claim that ‘this is not the right time’ for reforms such as those proposed. However, the fact that this claim can always be made does not mean it can always be ignored.
There is more uncertainty for UK business now than at any time in recent years. Brexit related uncertainty, political change and wider global volatility all contribute. Brexit will require a lot of additional project work, once the UK is clear on what will actually be delivered and when. At the same time, we want to keep as much business in the UK as possible. These measures will make it harder to hire flexible workers, and harder to do business in the UK, when we want to do the exact opposite.
There could not be a worse possible time for these changes to be introduced.
- Timing – employment status
Employment status generally is being consulted on, and options such as codifying status are being considered. The central difficulty at the heart of many IR35 issues is the complexity of employment status case law. These reforms do nothing to improve this (including CEST, see below) and indeed make the risk of inaccurate blanket assessments greater. HMRC also regularly loses employment status cases in court – doing nothing for the public understanding of the issue, which is muddled to say the least.
In addition, the new rules explicitly prevent those classified as employed for tax purposes using that status to benefit from statutory employment rights. This is so contrary to common sense as to be laughable. It is also hard to see how it will ‘stand up’ in court.
Only when the thorny issue of employment status is resolved properly, can reforms requiring businesses to deal with it efficiently be introduced. This work is ongoing – why are we rushing the part most likely to damage UK Plc?
- Timing – CEST tool
The consultation document acknowledges that CEST will be improved. However, there is very little time to make meaningful changes. At consultation round table meetings I have attended, including Mutuality of Obligation (MoO) in the tool in some way has been discussed by HMRC. Doing this properly would be a sensible improvement, with all the usual caveats about designing any online tool that can be simple to use, and deal with the complex issue of employment status.
However, this work cannot possibly be completed by April 2020, and tested. In addition, people will need the improved tool much earlier than that to assess assignments that cross over the April 2020 boundry. The tool, which could potentially be relied upon by hundreds of thousands of workers, in whatever incarnation, will not be ready.
- Timing – legislation
With a new prime minister being chosen, and Brexit stumbling on, legislation has a large chance of being delayed. Business needs certainty, and notice, to thrive.
Again, a change which has such an impact on the flexibility the UK holds dear, and which contributes significantly to its success, should not be rushed through at such a dangerous time. Business deserves better.
A properly evidenced, long prepared for change in legislation, once the current exceptional uncertainty is over, and the review into wider employment status is complete, would be the sensible choice for lawmakers.
Defining the scope of the reform
The consultation proposes the use of companies act size limits to classify end-users as small or otherwise. It does not ask an explicit question about this approach other than a very narrow question about applying parts of this test to unincorporated entities. It is not clear why this is, as the assessment of company size is critical to the law – if you are small, the rules don’t apply. So I offer some feedback here:
The companies act rules allow for a small subsidiary of a large group to be classified as small – this would get around the rules, allowing large end users to form small, exempt subsidiaries. From round table events, I understand HMRC are putting in anti-avoidance rules to counter this, which is sensible. However, it is notable that rather than staying with the companies act rules, for simplicity, we are already diverging from them, which is going to add to the confusion of applying them.
The companies act rules are regularly misapplied by accounting professionals. In addition, size criteria are determined retrospectively in the normal course of business. Here, the reform is intending to exclude small business from the reform, which has merit. However, the process of deciding who is small and who is not is not defined. This will lead to increased confusion, and the rules being misapplied.
The following needs to be confirmed urgently to allow businesses to plan:
- Who decides on size – the supply chain? If so, how can they ensure they get up to date information? Should they look at companies house? What if the accounts have been prepared under the wrong size criteria? If the next accounts are overdue, with a possible size change, what should the supply chain do?
- If the end user decides, do they in some way self-certify? Then who is liable if this certification is wrong? Should HMRC certify?
I have suggested at round tables that an online tool alongside CEST should be developed to allow the accurate categorisation of an end user. This, taken alongside the requirement to decide if services have been outsourced (so that the end user moves down the chain to the service provider, who will be in scope according to the consultation under the new rules) will lead to unnecessary confusion and expense as supply chains have to fulfil this new requirement, and evidence their fulfilling of it.
As to the choice between turnover and / or employees as a criteria for none corporates, passing the threshold on both simultaneously seems just, based on the similarities this would have to the criteria for incorporated businesses. Balance sheets are easier to manipulate than turnover and employee numbers.
It is worth noting that of course employee volumes are probably not the best size criteria for these rules – but we are applying something designed for company statutory reporting purposes to an engagement tax – which again highlights the non joined-up approach of these rules more generally.
A requirement to pass the decision down the chain to the worker and others is welcome.
Consultation question 2: Would a requirement for clients to provide a status determination directly to workers they engage, as well as the party they contract with, give off-payroll workers sufficient certainty over their tax position and their obligations under the off-payroll reform?”
Our response: Would it give sufficient certainty to the worker? I would say ‘not quite’, as it will only give the worker certainty over what the end user’s opinion is. It would be best to require end users to pass the decision and the reasons throughout the chain. This though, without any external arbitration process will not satisfy those contractors who do not agree with the decision reached.
It would be better if the decision was reached collaboratively with the whole chain. At round tables I have suggested a CEST tool that allows input from all parts of the supply chain would engage all the parties, and ensure that every part of the chain has a view of the decision making process. Of course, CEST wouldn’t have to be used but it would be a welcome improvement, and a starting point for a more difficult decision where status is unclear.
Consultation question 3: Would a requirement on parties in the labour supply chain to pass on the client’s determination (and reasons where provided) until it reaches the fee-payer give the fee-payer sufficient certainty over its tax position and its obligations under the off-payroll reform?
Consultation question 4: What circumstances might result in a breakdown in the information being cascaded to the fee-payer? What circumstances may result in a party in the contractual chain making a payment fo the off-payroll worker’s services but prevent them from passing on a status determination?
Our response: For Questions 3 and 4, it will be good to have a requirement for all parties to pass on the decision. However, the extra cost of putting in controls which will mean a contractor can only be engaged where this additional information flow has occurred and been verified (and recorded suitably for examination potentially years later) will be significant, and unwelcome for business.
There will also be difficulties, touched on again later in the consultation, in evidencing the flow of information where a party in the chain has ceased to trade and whose records are lost or otherwise unavailable.
Consultation question 5: What circumstances would benefit from a simplified information flow? Are there commercial reasons why a labour supply chain would have more than two entities between the worker’s PSC and the client? Does the contact between the fee-payer and the client present any issues for those or other parties in the labour supply chain?
Consultation question 6: How might the client be able to easily identify the fee-payer? Would that approach impose a significant burden on the client? If so, how might this burden be mitigated?
Our response: For Questions 5 and 6, if HMRC intend that every end user identifies their whole supply chain, then supplying the decision to all parts of it ought not to be difficult. However, the separation between the operational parts of supply chain communication and commercial communication will be sensitive, and again likely to add cost to business.
Consultation question 7: Are there any potential unintended consequences or impacts of placing a requirement for the worker’s PSC to consider whether Chapter 8, Part 2 ITEPA 2003 should be applied to an engagement where they have not received a determination from a public sector or medium/large-sized client organisation taking such an approach?
Our response: A PSC worker should be considering Chapter 8 in all cases now. The difficulty here is that if they are unclear on whether the end user is small (the absence of a communication is a very flimsy test) they may go to the expense of making a determination unnecessarily. As HMRC have noted previously that the 5% expenses allowance (which is being removed under the new rules) is intended to pay for the costs of making a status assessment, this cost is likely to be highly significant. This additional, and perhaps unnecessary cost should be avoided by having a clear information flow – alongside either self-certification by the end user, or a tool alongside CEST to reach a size determination that the supply chain can use.
Without such measures, the rules will just add to the difficulties of businesses operating in the UK.
Consultation question 8: On average, how many parties are in a typical labour supply chain that you use or are part of? What role do each of the parties in the chain fulfil? In which sectors do you typically operate? Are there specific types of roles or industries that you would typically require off-payroll workers for? If so, what are they?
Our response: Different sectors have very different supply chains, and I think an ‘average’ is not going to be useful. Some sectors such as Oil and Gas have longer chains, others typically have one or two agencies between end user and PSC.
Consultation question 9: We expect that agencies at the top of the supply chain will assure the compliance of other parties, further down the labour supply chain, if they are ultimately liable for the tax loss to HMRC that arises as a result of noncompliance. Does this approach achieve that result?
Consultation question 10: Are there any unintended consequences or impacts of collecting the tax and NICs liability from the first agency in the chain in this way?
Consultation question 11: Would liability for any unpaid income tax and NICs due falling to the engager (if it could not be recovered from the first agency in the chain), encourage clients to take steps to assure the compliance of other parties in the labour supply chain?
Consultation question 12: Are there any potential unintended consequences or impacts of taking such an approach?
Our response: In broad terms, liability transfer should help enforce compliance. However, in recruitment and similar supply chains, it is likely that dominant end-users will insist upon indemnities from lower down in the supply chain. The new rules should be written to acknowledge this.
From illustration B we see that liability can only reach an end user where agency 1 cannot pay. We don’t know the circumstances of ‘HMRC fail to collect’ but we can expect that to push for larger agencies getting business as agency 1, pushing out smaller businesses that may be doing a better or more flexible job. This will stifle new entrants to market which won’t be positive for the sector.
More fundamentally, looking at illustration B, it appears that Agency 1 and the end client could end up with a liability even where the rules have been followed – a correct status assessment has been made and passed on. Where there are long supply chains, the evidence needed to find out if agency 2 (or 3 or 4), did pass on the information correctly may disappear if any of them go out of business, or merge or otherwise cease to trade (and there are many perfectly reasonable reasons for this).
Therefore, it seems necessary for any end user or agency 1 or similar to keep details indefinitely of every supply chain through which they have ever engaged workers, and monitor if any parts of it fail, potentially requiring them to make accounting provision for the possible liability transfer of the new rules, and certainly devaluing their businesses on an ongoing basis. Their operations will be devalued, by uncertainty.
The rules will need to clarify more explicitly under what circumstances liability can be transferred, or they will be unworkable. In addition, if they are unclear, there will be more attraction for people to set up non-compliant ‘solutions’ to cope with the new rules – putting workers at risk of exploitation.
Section 4 – making the correct decisions etc
The proposals in section 4 are very weak. Contractors want some process of independent checking of a status assessment – preferably from HMRC, in real time. The process proposed is not that, and to be frank, will not make any practical difference to a contractor with a genuine disagreement with their end user.
As reasonable care is not defined in law, it is hard to see how these proposals make any serious difference to the problems raised by contractors and others.
Section 5 – Other matters
Consultation question 17: How likely is an off-payroll worker to make pension contributions through their fee-payer in this way? How likely is a fee-payer to offer an option to make pension contributions in this way? What administrative burdens might 23 fee-payers face which would reduce the likelihood of them making contributions to the off-payroll worker’s pension?
Our response: The ability to make a pension contribution through a fee payer is levelling the playing field somewhat with PAYE and umbrella workers (where compliantly engaged). However, I suspect that in reality, this facility will be very rarely used. Freelancers like working they way they do, and are not looking for parity with employees.
I can understand why the measure is being introduced – I suspect it is purely to ensure that the argument that a PSC inside the rules is disadvantaged by the pension restrictions cannot be made.
Consultation question 18 : Are there any other issues that you believe the government needs to consider when implementing the reform?
Our response: This area needs reform and the off-payroll / IR35 rules don’t operate well enough. However, these changes do not deal ‘once and for all’ with employment status, or non-compliance, or the Employer’s National Insurance shortfall that is the elephant in the room.
In not dealing with the real tax being avoided (Er’s NIC) what we will see if these rules are implemented is widespread disruption in supply chains, blanket decisions followed by roll back later, and many workers moving assignments unnecessarily to avoid a perceived risk of retrospective HMRC activity, made worse by the lack of understanding of the issue, and a lack of good, detailed guidance provided by HMRC, apart from a CEST tool which HMRC themselves accept needs improving.
The ‘avoided’ tax will be pushed down the supply chain in many cases, meaning the lower paid contractors suffer more than others. The disruption for the UK economy will be sizable and volatile while a market adapts to imperfect new rules, when new employment status laws are being worked on elsewhere.
At the same time, HMRC has RTI and agency reporting information that it has collected now for a few years – this would enable targeted enforcement action where it perceives risk – but this is not being used. Instead, we amend the rules once again.
There is concern over the limited evidence collected for the ‘external review’ which accompanied consultation 1 on off-payroll. I and others have asked HMRC to do more work on this – the original review did not consult a single contractor. This request has been refused. This is important, as many people are concerned about the impact on UK business – so a comprehensive impact assessment is the minimum required before applying the rules to the rest of the UK.
Taking all of this together, and given the current situation with UK politics and Brexit, which is already stifling business, why on earth would anyone do this now?