Orange Genie Group response to: HMRC & HMT consultation

Orange Genie Group response to: HMRC & HMT consultation “Off-payroll working rules from April 2020”

Background to Orange Genie Group 

Orange Genie Group was founded in 2005 and is recognised as a leading member of the Freelance and Contractor Services Association (FCSA).

Orange Genie provides outsourced contractor management services, including umbrella employment, self-employment, accountancy and business support solutions to the contingent workforce. Our services are rooted in legislative compliance and provide a risk management service to recruiters and their end clients.

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Our interaction with the IR35 legislation

Orange Genie operates as either an accountancy service provider to professional contractors or as umbrella employer and self-employed service providers. In all of these services the application of the IR35 rules is relevant; whether that being advising a new contractor on the most appropriate engagement method for them to provide their services (limited company v umbrella employment v self-employed) or advising a contractor operating via a limited company of the IR35 status of their assignment and the tax implications depending on their status.

Our membership of FCSA provides our stakeholders with the assurance that Orange Genie continues to operate in line with existing legislation and industry best practice when advising the many professional contractors with whom we engage. As such Orange Genie is able to comment on both the legislative framework and their practical experience of working within the current IR35 regime in the private sector and the roll out of the off-payroll rules in the public sector.

Orange Genie confirms it does not operate, nor have any interest, in any form of Offshore Scheme, Loan Scheme, Trust, Managed Services Companies Scheme, Pay-day-by-Pay model, or similar.

Executive Summary 

Introduction

Orange Genie welcomes HMRC and HMT undertaking this consultation to reform the legislation for off-payroll workers with a view to improving its effectiveness. We support the rationale behind considering a change to the off-payroll legislation to address non-compliance with the existing rules and to address the issues caused by an un-level playing field between the public and the private sectors.

It is likely that the proposals within this consultation will achieve an increase in tax collection, however, much of this increased tax take will be because of incorrect status assessments which will not be able to be successfully appealed by genuinely self-employed workers.

The IR35 changes in the public sector created an avalanche of new entrants into the market brazenly promoting both tax avoidance and criminal tax evasion schemes. We see nothing in the consultation that suggests HMRC and HMT have learnt any lessons in this respect We see the public sector, particularly healthcare, not only failing to curb these providers but also being prepared to sacrifice compliant recruitment agencies, accountants and umbrella providers.

As evidenced from the roll out of the changes to the public sector, much of the increased tax collected will be because of clients not understanding the rules and applying blanket inside IR35 assessments. There is clear evidence of this occurring in the public sector with FOI requests revealing the following organisations applying inside IR35 assessments to most of its off-payroll workforce: Network Rail 99% (of all workers deemed inside IR35), Met Office 98%, High Speed 2 98%. This has resulted in “false employment” of a significant number of genuine contractors in the public sector under a HMRC designed system that will not entitle them to any employment rights and has ignited the market for tax avoidance schemes to circumvent the unfairness resulting from these changes.

This same outcome will play out in the private sector (we are already aware of many large users of self-employed workers to deliver specialist projects planning to implement an inside IR35 approach across their entire off-payroll workforce) and the impacts that this will have on the availability of skilled flexible resource, proliferation of tax avoidance schemes and the delivery costs of projects will have far ranging ramifications across the economy.

FCSA research of circa 500 self-employed contractors found that 70% believe the proposals are unfair on the self-employed, 76% believe that all or some employment rights should be attached to an inside IR35 determination, 36% will only work on outside IR35 contract and 13% would leave contracting (early retirement, seek a permanent role or work overseas) if they were incorrectly assessed as inside IR35 by the client.

The evidence referred to above regarding public sector bodies responses to the 2017 changes and contractors’ views on the proposals reinforces most of the sector’s view that the proposals that HMRC are putting forward should not be progressed and a delay and alternative approach is required. The complexity, unfairness and administrative burdens that the proposals will bring to supply chains are damaging to the UK economy, damaging to the flexible labour market, damaging to the recruitment sector and damaging to the workers it will impact.

Key Recommendations 

We make four key recommendations in this submission:

1. An April 2020 implementation date for any reform should be ruled out and replaced by an implementation date no earlier than April 2021.

  • This would allow for private sector organisations to properly understand any new legislation and adequately plan for the changes.
  • This would also allow time for the Taylor review recommendations which fundamentally impact employment status assessments to be progressed (i.e. codification of employment status and alignment of employment rights to employment status for tax).
  • This would also allow time for HMRC to adequately address the proliferation in tax avoidance schemes that are aggressively targeting public sector workers, agencies and clients and are primed to target private sector workers in April 2020. Examples include disguised remuneration schemes, “redundant fee payers” entering the supply chain to make gross payment to PSCs regardless of the correct IR35 position, a rise in gross payment to sole traders and a growing market in IR35 tax liability protection insurance which bring MSC risk to the supply chain.  

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2. Liability risk under the new legislation should sit solely with the party making the compliance assessment and that liability should be transferable to directors of the relevant business.

  • Clients must solely bear the risk of any incorrect IR35 determinations and parties in the supply chain failing to pass on the required information should be held responsible for their failings.
  • This will ensure the correct party is liable for their own compliance failures, will remove some of the opportunities to exploit failings in the current proposals and remove unfairness created by the current proposals.

3. There needs to be more consideration of the impact on genuine contractors (and the flexible labour market in general) resulting from the behavior of the supply chain in response to the proposals

  • There is currently no penalty in the proposals if a client makes an incorrect “inside” IR35 decision or a blanket “inside” IR35 policy across its entire off-payroll workforce. The client lead appeals process proposal will not incentivise clients to come to the correct IR35 determination.
  • There is still no workable proposal for a worker challenge process – this should be administered by an independent body, not one of the parties to the dispute.

4. The CEST tool is not fit for purpose and should be removed or updated at least 12 months before the new legislation is effective.

  • The CEST tool has already been proven in the Courts to deliver an incorrect assessment and does not fully consider all the relevant factors in order to make a determination.
  • If HMRC wish to offer an online tool to help clients to make an employment status determination it should redesign the tool (and constantly keep this under review to adapt to any changes in case law precedent) and make this live at least 12 months prior to the new legislation going live.
  • It should also commit to stand by the results of the tool (albeit, it is difficult to envisage the results of any online tool delivering the correct result in 100% of cases).

In summary, we do not agree with HMRC’s assessment that their solution to address non-compliance with the off-payroll rules in the public sector has been a success. The shift in the balance of power from the PSC to the end hirer may be more convenient for HMRC and generate more (albeit incorrectly assessed) tax and NIC but it is not proportionate to the issue it sought to address and will result in many unforeseen negative outcomes and behaviours. More time is needed before any changes are rolled out to the private sector and the current proposals need significant improvements or need to be replaced by an alternative approach.

Response to Specific Questions  

Question 1 – Do you agree with taking a simplified approach for bringing non-corporate entities in to scope of the reform?

We disagree with the proposal to have a small company exemption. PSCs are the very smallest of businesses with limited financial and human resource and HMRC should therefore consider the increased burden and risk on PSCs created by the desire to reduce the administrative burden for small businesses. We feel the exemption creates confusion and additional administration for the supply chain and therefore should not be progressed. It is interesting to note that “confusion, error and manipulation” were cited as reasons by HMRC not to proceed with a small company exemption in the consultation on “VAT: reverse charge for building and construction services”.

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If it is progressed, the legislation should prescribe that a small business should be responsible for assessing whether it meets the exemption and (together with the supply chain) communicating this down the supply chain to the PSC. If a client incorrectly assesses itself as being medium or large and therefore subject to the new rules (Chapter 10) and communicates this to the PSC then the PSC should be exempt from applying Chapter 8 if the end client was in fact a small business.

Regarding non-corporate entities, given the intention is to remove the smallest of businesses from the new rules due to their lack of capacity to implement the changes, we feel that the exclusion should be as broad as possible and as a result would support the second option i.e. to apply the reform to unincorporated entities that have both 50 or more employees and turnover in excess of £10.2 million.

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?

It does not give them certainty over their tax position. The tax position of the workers should not rest solely in the hands of an employment status decision made by the client. The tax position is dependent on accuracy of the client’s decision which we have seen to be incorrect tin many cases in the public sector.

Transparency for workers is essential as many workers will now consider the client’s status decision as a key factor in whether to accept a role or not and early sight of this determination will allow them to withdraw from the application if they disagree with it or commence a challenge process if they consider this to be appropriate. Unfortunately, it is difficult to obtain certainty over the status of a role as status is assessed subjectively and it is only the Courts that can provide certainty.

It should however be noted that the timescales by which this information is required to be provided gives rise to some challenges. The information needs to be provided prior to the contract commencing or prior to the worker starting to provide their services. This makes it difficult for the client to make a fully informed assessment of status as they do not have the benefit of assessing the contract “in action” and must decide prior to the working practices being demonstrated. This is contrary to the current position in the private sector where the director of the PSC has until the end of the tax year to make an IR35 status assessment and can therefore consider both the contract and the actual working practices. This is one of the reasons why there is a perception, and in some cases evidence, of clients taking a blanket approach.

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?

This approach would give fee payers visibility over their proposed tax position; however, it gives them no degree of certainty. The client’s determination may be incorrect despite them taking reasonable care, in which case the fee payer would be responsible for paying any underpaid tax / NIC should this arise in the future. This is a significant issue with the proposals.

It would make far more sense for clients to remain responsible for any underpaid tax arising because of them making an incorrect assessment. This can be achieved by using similar provisions detailed in ESM2039 which determines who should be responsible for operating PAYE when more than one party is involved in the provision of the worker’s services. The legislation should work by prescribing that the fee payer is responsible for withholding if the client determines the worker to be inside IR35 but the responsibility for collection reverts to the client in circumstances where the client has determined the worker’s service to be outside of IR35 but it is subsequently proven that they should have been classified as inside (whether the client has taken reasonable care or not).

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 for the off-payroll worker’s services but prevent them from passing on a status determination?

This requires a robust process to be implemented throughout the supply chain. A breakdown in information being cascaded to the supply chain would result if the process is not followed. This could happen in many circumstances; turnover of staff involved, absence of staff involved if the process is manual, human error etc. Given the potential tax risk involved, this process would need to be tightly managed and controlled by all organisations in the supply chain. A simpler approach would be to ensure the information to be passed to the PSC and/or the fee payer only with others in the supply chain being absolved of responsibility or risk.

There are two populations to consider here. The first being the incumbent workers whose contracts extend beyond 5 April 2020; we think this will be the most difficult population to deal with as a communication process would need to be established to advise these workers of the client’s status determination (including a suitable appeals process). The complications, time, resource and potential tax risks associated with this process is likely to result in many contracts being terminated early, prior to 6 April 2020. This highlights an unintended consequence of the proposals.

The second population is those contracts commencing after 5 April 2020, this might be easier to manage; for example, the contract description for these roles could incorporate the IR35 status and the predominant reasons driving that determination. It would require the contract description to be agreed by the client and the first agency and all intermediaries in the contractual chain agreeing to use this agreed contract description when advertising the contract. This approach is however likely to give rise to accusations of a blanketed approach which may not meet the reasonable care requirement. As discussed in the response to 2, guidance would be welcomed in this area and this guidance should be published in enough time for the supply chain to design, test and roll out its processes.

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 workers’ 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?

Extended labour chains are not uncommon and quite often occur where a Managed Service Provider (MSP) is involved in the supply chain. For example, a business may outsource its security operations to a security contractor business who then outsources its recruitment of contract labour to a MSP. The MSP may then subcontract to tier one and tier two agencies, particularly for the higher skilled contractor roles where suitably qualified and experienced contractors are scarce. This presents an extended contractual chain with uncertainty as to who is the client under the legislation. The extent of the activities undertaken by the security contractor business (is it merely the provision of labour or is it the provision of outsourced services) will be determinative and will need to be assessed before everyone’s obligations can be determined.

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?

Perhaps the most important question to consider is how the client might be able to determine whether a PSC is providing the services and therefore whether the off-payroll legislation applies. This may not be known until very close to the commencement of the contract as the worker can choose how they want to deliver the services required. For example, this could be via direct payment as an employee of the agency, direct payment as a self-employed individual of the agency, payment via employment with an umbrella company, payment via self- employment with an umbrella company or via a PSC.

Only once this information is known does the client need to consider who the fee payer is and whether they need to consider the off-payroll rules. Once it has been established that a PSC will be delivering the services the end client will then need to consider the IR35 status of the contract and identify the PSC to enable it to communicate the determination. Quite often the timescale for procuring contractors is relatively short (a few days) which will provide a challenge for this information exchange to be completed successfully. This problem will be further compounded if the client must also identify the fee payer and provide information to them prior to the contract commencing.

This approach would impose a significant addition burden on the client which is likely to be mitigated by the client either foregoing the worker or blanketing / mandating that no PSC should be offered to fulfill the role. This highlights another unintended consequence of the legislation which can be evidenced by this approach being taken in the public sector, most noticeably by TfL and the NHS.

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?

The requirement for a worker’s PSC to consider whether Chapter 8 ITEPA applies should not be driven by the lack of receipt of information from another party in the supply chain. If a small company has not provided information to the supply chain to confirm that it is a small company then the new rules should apply to the small company and it then become responsible for any underpaid tax. It is not overly burdensome for a small company to be required to advise the supply chain that it meets the definition and it is not overly punitive for the purported “small company” to fall under the rules if it fails to meet this requirement.

This is a further complexity resulting from the proposal to exclude small businesses and one of the reasons why we don’t think this exclusion is appropriate.

Question 8 – On average, how many parties are in a typical labour supply chain that you use or are a 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

The length of supply chains varies considerably from a chain involving 3 entities (a client, one agency and a PSC) to chains involving upward of 5 entities (a client, outsourced service providers, MSPs, multiple agencies, fee payer service providers and a PSC). Length of supply chains is driven by sector (e.g. oil and gas is typically a long chain with multiple service providers) and complexity of rules currently governing the provision of services in the contingent labour market. There are not many businesses who have the internal resource to not only source labour but manage the associated compliance which the sector now faces. The introduction of these changes is likely to drive additional entities entering the supply chain to either help others to comply or to attempt to circumvent the rules and drive non-compliance.

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 because of noncompliance. Does this approach achieve that result?

It should be noted that the Criminal Finances Act 2107 introduces a new corporate offence of failure to prevent the facilitation of tax evasion. A defense under this legislation is to demonstrate the implementation of reasonable prevention procedures to deter tax evasion within supply chains. If tax evasion occurs in a supply chain, if a business has put in place procedures to prevent this from happening, then it does not face prosecution. The proposals within the off-payroll legislation go beyond this with a low threshold for liability to arise. This does not seem equitable with the requirements of the CFA which seek to tackle the far more serious offence of tax evasion as opposed to a compliance failure. The proposals, in our view, are too extreme and onerous on the agency at the top of the supply chain.

It is naïve to think that agencies at the top of the supply chain will be able to adequately police the actions of those lower down the supply chain to the extent required to not expose itself to an unexpected tax bill without significant contractual changes and in-depth auditing and assurance activity. The proposals are therefore likely to result in restrictions imposed on supply chain entrants and indemnities being required throughout the supply chain.

To drive compliance with the new rules any liability should be solely isolated to the entity that has incurred the “compliance failure” and attempts should be made for the liability to go beyond the corporate veil and extend to the shareholders / directors of the business in question.

The success or failure of these changes will be driven by the volume and success of HMRC compliance activity which as yet remains untested in the public sector and has been widely criticized in relation to the existing private sector rules. It is therefore not clear to us how HMRC will actively enforce this legislation and indeed what budget or team(s) HMRC have allocated to carry out compliance activity. Some commentary on this would be useful for the market.

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? Please explain your answer.

This proposal does not seem fair or equitable. It is impossible for the first agency in the supply chain to ensure that all other entities in the chain meet their obligations. This is therefore likely to result in a contraction of the number of businesses having access to contracts within labour supply chains and is likely to have a significant impact on the recruitment sector. The first agency will seek to limit the number of entities in the supply chain and work only with larger well-established providers who are more likely to meet their obligations 100% of the time. The smaller providers and new entrants to the market will reduce in numbers. This unwanted behavior and restrictions to the buoyancy of the recruitment sector for contingent resource will solely be driven by this measure.

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?

Yes, however, we believe this would compound the unintended consequences details above and reiterate that liability should rest with the business (and its shareholder / directors) that failed to meet its obligations.

Question 12 – Are there any potential unintended consequences or impacts of taking such an approach? Please explain your answer.

See response to question 10.

Question 13 – Would a requirement for clients to provide the reasons for their status determination directly to the off-payroll worker and/or the fee-payer on request where those reasons do not form part of their determination impose a significant burden on the client? If so, how might this burden be mitigated?

No. If the client has taken reasonable care in making their status determination, then it should have the reasons documented. It may be useful for HMRC to provide a template or guidance as to the level of details and / or the format that they would expect to see both the status decision and reasoning presented in.?

Question 14 – Is it desirable for a client-led process for resolving status disagreements to be put in place to allow off-payroll workers and fee-payers to challenge status determinations?

No. It is not appropriate for the originating source of the decision to then be responsible for managing and concluding on a challenge process. For any form of challenge process to be achievable it needs to be governed by an independent body. In addition, a client-led appeals process will not deter clients from taking a blanket approach or incorrectly classifying contracts as inside IR35 when it is not. The proposals do not contain any tax or penalty driven incentive to deter clients from making an inside IR35 assessment when the facts point to the contract being outside of IR35. As a result, many clients are likely to revert to a risk-free approach and blanket all contracts as inside IR35. This is our biggest concern with the proposals as they are likely to lead to significant amounts of “false employment” and imposing a client led challenge process will not deter clients from taking this approach. See the response to question 18 for more information on why this causes us concern.

Question 15 – Would setting up and administering such a process impose significant burdens on clients?

We do not think the proposal should be implemented, see above.

Question 16 – Does the requirement on the client to provide the off-payroll worker with the determination, giving the off-payroll worker and fee-payer the right to request the reasons for that determination and to review that determination in light of any representations made by the off-payroll worker or the fee-payer, go far enough to incentivise clients to take reasonable care when making a status determination?

No. In most cases the balance of power resides with the client who has no incentive to reassess an inside IR35 status determination. This will only happen in extreme circumstances where the contractor is in demand or offers a scarce resource. As noted in 14 above the proposals are lacking any incentive for clients to ensure that an inside IR35 status determination is correct.

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 fee-payers face which would reduce the likelihood of them making contributions to the off-payroll worker’s pension?

Many contractors delivering their services via a PSC have a company pension scheme in place which their employer (the PSC) makes employer contributions to. Preserving this opportunity for impacted workers would be a good approach to take. However, we think most fee payers would choose not to accommodate contributions given the administrative burden it would create.

Typically, an employer will make pension contributions to one provider and will have centralized processes to ensure the contributions are made in an efficient manner. A fee payer would resist having to make pension contributions to multiple pension scheme providers with differing payment dates and payment methods. As a result, this suggestion is unlikely to happen in practice. A more workable approach would be to amend the tax and NIC system to allow the PSC to make contributions and claim back any overpaid tax / NICs.

Question 18 – Are there any other issues that you believe the government needs to consider when implementing the reform? Please provide details.

It is apparent from the consultation document that HMRC are focusing this consultation on the impacts the proposals will have on the client and fee payer. There is very little consideration given to the impacts on the PSC or worker.

Perhaps the two biggest issues that are not adequately addressed are the inability for the worker to appeal to an independent body where it feels an incorrect assessment has been made and the lack of employment rights for workers deemed to be subject to the rules.

The consultation is clear that it does not consider that employment rights should be afforded to off-payroll workers deemed to be inside the rules by the client. This approach opens the door to significant exploitation of low paid, low skilled workers. It allows a mechanism by which an engager can use workers and bypass employment rights by requiring that they work via a PSC and deem them to be inside the off-payroll rules. This means that the client and supply chain carry no tax risk but has a route to exploit vulnerable workers by paying less than NLW, denying them holiday pay, sick pay, pension provision and other employment related benefits. The interposition of a PSC between the worker and client de-risks the supply chain from backdated claims for employment rights and claims under AWR; HMRC / HMT and the Government’s continued assertion that no employment rights are afforded to individuals subject to the off-payroll rules legitimizes this immoral and exploitative activity.

Contact details for further information 

Graham Fisher, FCCA

Group Chief Executive
Orange Genie Group Ltd
01296 480967

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