HMRC’s consultation on off-payroll working in the public sector was issued at the end of May 2016. Here we consider the impact on the industry should the proposals be adopted in their current state.
The 87-page document, which you can download here, addresses the government’s proposals to strengthen compliance with IR35 in the public sector.
Here, Duncan Strike, Director of Intouch Accounting considers two specific aspects from the document: 1) the proposed process for assessing status and 2) the digital tool.
How will employment status be assessed?
The consultation proposes that the party closest to the personal service company (PSC), and therefore paying them, must determine whether the proposed rules apply and, if they do, to undertake an assessment of whether deemed employment exists.
For the purposes of this article, we will refer to this closest party as the ‘Agency’ although this may not always be the case in a long supply chain.
To assist the Agency, the proposals set out a simplified process:
Step 1: Making the decision about whether the rules may apply
This step is a simple flowchart intended to ensure the test in Step 2 is only undertaken by the relevant party and only to public sector assignments with a worker via his or her own PSC.
Step 2: Is the assignment within scope?
This step considers two simple questions. If the answer to both is “Yes”, the new rules are applied. If either answer is not “Yes”, the assessor must complete Step 3. More about these two questions later…
Step 3: Complete the digital tool
The digital tool will test status and the outcome accepted by HMRC.
So, this seems easy to complete. But there is a pitfall with this simplicity that government appear to have overlooked. The consultation assures us that government has no intention to change the basis of determining deemed employment; sadly, it appears this assurance is misleading. Step 2 above includes a disguised change to the assessment of deemed employment itself.
In the UK, when laws need to be interpreted, precedents are set by the decisions of the courts and tribunals, with the consequence that all parties, including HMRC, are bound by their decisions. The assessment of employment status is no different and there are many precedents that address how this should be determined.
It is well understood that the existence of deemed employment is determined according to a number of different measures, including:
- Personal service
- Mutual obligations
- Financial risk
- Commercial risk
- Intention of the parties, part and parcel
And each of these in the context of the specific assignment.
The three-step approach proposed is inconsistent with the above, meaning that public sector workers will be assessed on a different basis to the private sector. To explain, the two questions in Step 2 are:
- Is personal service required?
- Does control exist?
It is, therefore, possible for an assignment that includes personal service and control to be within the rules despite the fact that taking other considerations into account, the assignment might not be within IR35 when applying the broader, recognised tests.
So here we have the first problem. The assessment is not undertaken in the same way as non-public sector workers.
Under proposed rules, an assessment must be undertaken before the contract is agreed. This makes sense because the contract has to address the legal right for the Agency to withhold income tax and National Insurance (NI) and secondly to adjust the contract rate to reflect employers NI due from the Agency.
We now have the second problem: the collection of relevant facts. The parties that are aware of the intended working practices are the engaging client and the worker. The engaging client may not be the party responsible for the assessment which means that considerable effort is required to obtain relevant facts. The consultation does not address how this will work in practice, nor provide any incentive for the Agency to complete the process fairly. Our concerns include the following:
- Will the assessor understand what facts need to be obtained?
- Does the assessor possess the knowledge of the role and tasks/projects involved?
- Is the assessor adequately incentivised to undertake a full assessment?
- Will projected working practices vary compared with the actual working practices?
- Will working practices evolve over time, and if so, require a repeat process?
- Will agencies invest sufficiently to ensure that the necessary skill, expertise or experience to fully interpret facts is available?
Sadly, we believe that the practical and financial burdens together with the risk of transfer of debt mean many Agencies will have little choice than take a low cost, low-risk approach, sideline their responsibilities and simply determine the answers at Step 2 as “Yes”.
What about the digital tool?
The consultation places considerable reliance on a digital tool to assist assessors with determining status. It is a key element of the desire to provide assessors with a simple means to meet their obligations.
However, the tool has not yet been released, examined or tested. It is therefore difficult to consider how effective it will be until its release. Needless to say, we have reservations that a complex issue such as employment status can ever be determined in a simple way.
HMRC are often found to set out their tax guidance based upon its own view of the world. There are many reported instances where it is found that HMRC manuals convey a view that is contrary to the legislation. Therefore, given that HMRC cannot be entirely relied upon for an unbiased view, how can taxpayers be assured that the digital tool will be anything other than biased towards an employment outcome?
Determining employment status is a complex issue. Every assignment will be subject to different circumstances and the relevant facts need to be considered in the light of those circumstances. For example, circumstances differ according to:
- Role intended
- Engaging client internal organisation, process and management
We doubt HMRC will develop a digital tool that is capable of taking into account the variables above, nor that HMRC can be sufficiently independent to include rules that offer a fair, unbiased result.
What happens next?
The consultation suggests that HMRC will be bound by the digital tool outcome. Fair enough but there is a proviso, that the facts used are accurate and complete. We can easily establish that facts need to be considered in the light of circumstances in order to answer a question. Will HMRC use different interpretations of the same facts to secure an exit route from a result that is unsatisfactory to HMRC? Experience would suggest they will not be bound by anything not in their favour.
The consultation closes on 18th August. You can find out more, and how to respond, here.