Private Sector IR35 Consultation Announced

IR35 Consultation

Following their announcement in the Autumn Budget, the government have launched their consultation on tackling non-compliance with the off-payroll rules (IR35) in the private sector, which will run from 18/5/2018 to 10/08/2018.

It will come as no surprise to many that the government’s “leading option” is to extend the public-sector reforms of April 2017 into the private sector. There has been a feeling of dreadful inevitability surrounding this issue since the public-sector launch, and the consultation document has done nothing to lift it. HMRC continues to claim the shambolic public-sector reform as a success and they dismiss evidence to the contrary as “anecdotal” and “not matching HMRC’s experience”.

They have also dismissed 4 previously suggested options as being “out of scope”:

  • Minimum length contracts – out of scope as it fails to recognise the nature of the relationship in each contract and relies purely on a time element
  • Freelancer Limited Company – out of scope as it would create a new tax regime – is this not what is needed?
  • Client pays employer NIC’s – outside of scope as it fundamentally changes the NIC rules
  • Flat rate withholding tax – outside of scope as it would require a test or certification to determine who could be paid gross and could result in incorrect amounts of withholding tax being withheld.

It is disappointing that the scope of the consultation is so narrow. We feel it’s rather strange to automatically exclude any option that involves making changes to the tax regime, since the consultation itself states “there is evidence that the legislation is not working effectively”.

The two other “in scope” options, Encouraging or requiring businesses to secure their labour supply chains and Additional record keeping are characterised by the consultation document as potentially burdensome to businesses. We’re left in no doubt that HMRC favour extension of the public-sector reform into the private sector and will resist the selection of any other option.

We fundamentally disagree with a number of assertions made in the consultation, for example:

“Two people doing the same job in the same way should pay the same amount of tax, regardless of how they are engaged”. This statement disregards the additional cost of operating independently and the additional risks of doing so. We are told, often, that the government recognises the value of the flexible workforce and its contribution to UK competitiveness. This statement, and the frequency with which it is repeated, would appear to contradict that.

“The evidence suggests that the public-sector reform has been effective in reducing non-compliance”. This statement makes the assumption that increased tax receipts indicate increased compliance, ignoring the fact that many contractors are paying more tax than they should be, having been deemed “inside” IR35 by incorrect blanket decisions. It also ignores the explosion of inventive and often predatory tax avoidance schemes that have sprung up to exploit contractors who seek to protect their falling incomes.

“HMRC estimates that only 10% of PSCs that should apply the legislation actually do so.” – HMRC have been asked repeatedly to support this figure and explain where it comes from. Such support is conspicuously absent from the consultation document, as it has been from similar publications in the past. FCSA research involving data provided by the Public Accounts Committee on a sample of 2500 contractors, suggests around 90% compliance.

Painful as it might be to admit, Orange Genie and others have made these points many times and we have been effectively dismissed. However forcefully and eloquently we make them now, we can’t reasonably expect the government to listen when they haven’t before. The definition of the word “anecdotal” appears to now include “does not support HMRC’s view”.

This doesn’t mean we won’t continue to make those arguments, or that we advise the industry to roll over and accept its fate. It’s important that we keep fighting, but we should also prepare ourselves to deal with this reform when and if it eventually takes place.

The consultation document does state “we are committed to learning from experience”. Given that we expect the reforms to go ahead, this is what we hope that means.

The reform will be communicated and policed effectively.

One of the main challenges with the public-sector reform, and one that still persists despite claims to the contrary, is the lack of expertise and resource available to public sector bodies. Many have been unable to individually assess the status of the contractors they engage and have instead used blanket decisions based on cost and risk, rather than the facts of each engagement.

The public-sector reform involved around 50,000 organisations, all under government control and funded by the tax payer. Even so, the government has been unable to effectively educate the sector and in many cases the reform has not been properly implemented. Having failed in their “own house” it’s unlikely that they’re prepared to implement similar reforms in the private sector.

The private sector is a very different place. It comprises 5.5 million private companies, who can be relied on to resist any increase to their workload or costs. Knowledge of IR35 is sparse and often inaccurate, even among high-street accountants. The challenge of communicating and policing private-sector reform is truly enormous, and should be given respect, time and resources that were not present at the public-sector roll-out.

The CEST tool will be made fit for purpose

In the run-up to the public-sector reform HMRC released Check Employment Status for Tax, an online tool for checking whether engagements fall "inside" or "outside" IR35. At the time they said it would give their opinion of IR35 and true to their word that’s exactly what it does, ignoring some case law in favour of their interpretation. They have admitted that the CEST tool deliberately ignores mutuality of obligation because they believe MOO applies to all contractors, and they have so far failed to follow through on their promise to release a statement in support of this.

HMRC’s recent tribunal defeat in the Jensal Software case was in part due to their flawed understanding of MOO, and the case has led many to question HMRC’s grasp of the legislation they are tasked to enforce.

We suggest a ground-level overhaul of the CEST tool to bring it in line with case law and make it of actual practical use. Such a tool, if it could be trusted to give an accurate result, could go a long way to reducing the expected chaos and resulting damage.

HMRC will be prepared to deal with increased non-compliance in other areas

The public-sector reform coincided with an explosion in the use of non-compliant tax avoidance schemes, many involving offshore structures and/or loan arrangements. This was a result of contractors seeking ways to protect their incomes after they were deemed to be inside IR35.

Without effective enforcement, this pattern will repeat and it’s likely to be on a much larger scale. HMRC will need to have appropriate resources in place to tackle increased use of tax avoidance schemes before any reform goes ahead.

The reform will not be rushed through

If a private sector roll-out is to avoid the disastrous chaos we saw in the public sector, all these things need to be in place before implementation. HMRC need to educate 5.5 million potentially reluctant organisations, re-write the CEST tool so it will be used and trusted, and prepare to tackle a perfect storm of tax avoidance. All this work will take time, and any attempt to rush through the reform will do untold damage to the flexible workforce, and ultimately the competitiveness of the UK.

We hope that any reform of off payroll in the private sector will take all these factors into account, and that the disaster we expect can be averted. However, it’s our strongly held belief that the proposed reform will be catastrophic for our industry, and for the UK as a whole. We will therefore continue to argue against this reform and we urge you to do the same.

We will, as always, keep you informed as events unfold, and we’ll do everything in our power to help you adjust and adapt should the need arise.

If you have questions about the consultation or if Orange Genie can help in any way please contact our expert team on 01296 468483 or email info@orangegenie.com 

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