The deadline for responding to HMRC’s consultation document on extending the off-payroll rules to the private sector has expired. So, how did the contracting industry’s biggest players respond?
In April 2017, IR35 ‘off-payroll’ rules were applied to contractors working in the public sector. This effectively means that clients, not contractors themselves, are responsible for operating the IR35 rules.
Despite widespread concern about the chaotic implementation, and the inaccuracy of the employment status test tool, on May 18th 2018, HMRC published a consultation document – to assess the viability of expanding the legislation to the entire private sector. The deadline for responses closed on Friday 10th August.
The Treasury claims that the cost to the Treasury of ‘non-compliance’ in the private sector could reach £1.2bn by 2022/23.
If the rules are applied to the private sector, this could have a significant impact on the contracting world. New legislation could be in place as early as April 2019 (although this may be a stretch).
Even though, in theory, most contractors can demonstrate that their contracts are ‘outside IR35’, many public sector clients have issued blanket ‘inside IR35’ determinations to all of their workers. Others have been forced to use umbrella companies. This pattern could repeat itself in the private sector.
These and many other fundamental issues have been considered by business organisations, accountancy firms, and many others over the past few months.
“Don’t do it!”
Freelancers’ group, IPSE, was damning in its response to the consultation document – asking the Government simply not to implement the proposed reforms, calling it an “extraordinarily short-sighted policy”.
IPSE also slams the online employment status (CEST) tool: “How can the government expect businesses to make complicated IR35 determinations when HMRC, with all its expertise and resources, can’t do it and the tool doesn’t work?”
Recruiters warn against rushed policy
In its official response to the consultation, The Recruitment & Employment Confederation (REC) says that any extension of the existing public sector rules shouldn’t be rushed. Implementation in April 2019 “would create upheaval in the private sector and risks damaging the flexibility of the labour market.”
The industry body suggests that the Government should complete a “comprehensive post-implementation review of the public sector changes”, as well as an impact assessment on the private sector.
Likewise, APSCo recently “stressed the potential implications of implementing changes within an unrealistically short timeframe” during a meeting with Financial Secretary to the Treasury Mel Stride.
“Re-cast” Employers’ NI as a levy on business costs
The Chartered Institute of Taxation (CIOT) makes the broad (and important) point that businesses prefer to hire PSCs over staff, as this insulates them from paying employers’ NICs and also potential employment rights. The tax body says (underlined for effect)… “we think the IR35 issue, the taxation of the employed v self-employed and labour law should all be viewed through the same lens and considered together.”
As a result, if employers’ NICs were “re-cast as a levy on operational business costs rather than being focused very narrowly on wages then the tax motivation for business to encourage PSCs would arguably be lessened”, as the cost of hiring an employee or a contractor would be the same.
Improve the existing IR35 regime without new legislation
A leading insurer, Qdos, says that the public sector reform “has had a significant, detrimental impact on thousands of workers who were genuinely operating outside IR35.”
It points to the forced use of umbrella companies by public sector bodies, and well-documented failings of the CEST tool.
Qdos suggest ways in which compliance can be improved without the need for new legislation, by making the investigation process more efficient, using existing information more effectively, and by HMRC dropping cases at an earlier stage when they have little chance of winning.
An alternative? Existing IR35 rules with more stringent reporting
The FCSA which represents some of the UK’s leading contractor service providers says that Government’s £1.2bn non-compliance claim and others are “overinflated”, and that “the 2017 reforms have been a shambles and the Government cannot realistically countenance any roll out to the private sector.”
The organisation has put forward an interesting alternative – The Enhanced Reporting and Enforcement solution, which “will allow Personal Service Companies (PSCs) to retain responsibility for their IR35 status, as they currently do, albeit with an obligation of reasonable care.”
Under this alternative scheme, all labour supply chains will be secured, with information shared throughout the chain, and reported quarterly to HMRC.
Don’t target the smallest businesses
Accountancy firm, Crunch, says that if the implementation has to go ahead, there should be at least an 18 month lead time, and should not apply to businesses with less than £50m turnover. Small businesses should be able to operate under the existing IR35 rules.
We’ll add further responses this week.