This week, HMRC has issued a new ‘issue briefing’ on the forthcoming off-payroll (IR35) changes. The aim of the publication is to ‘help organisations prepare’. With the help of an industry expert, we do some fact-checking on the statements and claims made by the taxman.
Aside from the fundamental injustice of the IR35 legislation itself, two of the main complaints from those caught by the April 2017 public sector off-payroll rollout were: a) the inaccuracy of HMRC’s online employment status tool, and b) a lack of reliable guidance for contractors, recruiters and clients alike.
In this issue briefing, HMRC covers some background to the reforms, justification for the changes, the guidance currently available to those affected, and information on the widely-criticised CEST employment status tool.
Exclusive commentary download
We’re grateful to IR35 expert Dave Chaplin, CEO of ContractorCalculator, who has provided a 20 point dissection of the briefing note exclusively for our readers. You can download his commentary here (PDF).
Chaplin has also launched IR35 Shield, powerful online software which can quickly and accurately prove your IR35 compliance.
CEST – an upgrade promised by end of 2019
The check employment status for tax (CEST) tool – has been designed to help determine the employment status of workers – who may or may not be caught by IR35.
Those familiar with the tool will know that it is a very flawed piece of software. The main criticisms aimed at CEST (as stated by a wide range of industry experts) include:
- CEST does not include the Mutuality of Obligation (MOO) – one of the most fundamental employment indicators. MOO is an obligation on the part of the client to provide work, and an obligation by the contractor to accept the work.
- CEST appears to be overly-reliant on whether or not the individual has the right to use a substitute.
- The test itself relies on answers to a relatively small number of questions (16) to establish employment status, which cannot reproduce all real-life scenarios. Due to the nature of the test, it cannot take into account working practices or any number of nuances which are not covered by its limited scope.
HMRC states that “the tool has provided a determination in at least 85% of uses” – a very low percentage for such a critical tool.
However, HMRC says that it will launch a new version of CEST by the end of 2019 – the taxman says that it “worked with more than 300 stakeholders to make the tool clearer, reduce user error and consider more detailed information.”
Justification for the off-payroll changes
In the briefing note, HMRC tries to justify the existence of IR35 itself, as well as the off-payroll strain – due to hit the private sector in April 2020.
It states that an individual who turns over £50,000 via their limited company will pay £6,000 less than someone who is a traditional employee (including income tax, employers’ and employees’ NICs).
This statement ignores the fact that the individual in question is running a company, and has a variety of business-related costs to consider (accountancy fees, business insurance, training, health insurance, etc.) – these ‘perks’ are enjoyed by traditional employees. For those caught by IR35 under the new rules, they will be considered employees for tax purposes, but will have no employee-type benefits whatsoever.
As Chaplin points out in his downloadable commentary, the vast majority of the extra tax due as a result of an in-IR35 determination is actually payable by the firm hiring the contractor (80% of it)!
Employers NICs and the Apprenticeship Levy must be paid on top of a contractor’s agreed contract rate. These ’employment taxes’ cannot be deducted from employment income.
What about retrospective taxation?
HMRC states: “HMRC have taken the decision that they will only use information resulting from these changes to open a new enquiry into earlier years if there is reason to suspect fraud or criminal behaviour.”
Given the unfairness exhibited by the controversial Loan Charge, how do contractors know that they will not be pursued further down the line for historical tax liabilities. For example, if they are deemed to be inside IR35 after April 2020, will any previous contracts be subsequently found to have been ‘inside IR35’ too?
Chaplin notes that HMRC can still use “existing information” as opposed to “information resulting from these changes” to open enquiries. For example, 1,500 contractors who have worked for GSK were recently sent letters accusing them of non-compliance, despite HMRC not having sight of any of these individuals’ working practices.
“This claim by HMRC, unless put into statute, by way of amnesty, is as reliable as a chocolate fireguard.”
How about support for affected businesses?
Since IR35 was first implemented in 2000, critics of the legislation have often highlighted the lack of clear guidance and support available to businesses. HMRC says that, this time around, there will be one-to-one support for 2,000 of the UK’s largest employers, and “direct communications to around 15,000 medium sized businesses.”
With 80,000 businesses (including 20,000 agencies) potentially affected by the April 2020 changes, this appears to leave 53,000 firms with little or no access to HMRC advice.
You can download the complete commentary here. In terms of fact-checking, it is interesting to note that almost all of HMRC’s statements in this publication can be challenged in some way.