The Government's consultation on clamping down on the way contractors operate in the private sector has come to an end - and brought a resounding chorus of warnings and concern.
The main matter considered in the consultation was to introduce something similar to the controversial changes which have already come into force in the public sector. It essentially shifts responsibility for determining IR35 status from self-employed individuals themselves to the clients who engage them.
IPSE - 'Don't do it'
Freelancer group, IPSE, sent a clear 'Don’t do it, and definitely don’t do it anytime soon’ message to the Government.
In its response to the consultation, IPSE warned that pushing the change out into the private sector would heap a greater administrative burden onto UK businesses, reduce productivity and further complicate employment status law.
It particularly urged the Government not to extend the reform while the uncertainty of Brexit is hanging over the economy, arguing that it needs the flexibility provided by freelancers now more than ever.
IPSE also used the response to raise concerns about the reliability of HMRC’s much-criticised CEST (Check Employment Status for Tax) tool, asking how clients could be expected to determine IR35 status when even HMRC’s own tool cannot.
Andy Chamberlain, IPSE’s Deputy Director of Policy, said: “Extending the changes to IR35 to the private sector would be extraordinarily short-sighted – especially now. If you believe many economists, the UK is already staring into a Brexit-shaped abyss. Why would the Government want to introduce a measure that will damage one of our greatest competitive advantages: our flexible economy?
“Research by IPSE and the CIPD has shown that the changes did serious damage to the public sector, causing walkouts, project delays and even cancellations. There are many more self-employed people in the private sector, so the damage from this could be far more significant. Not only would the changes be a major administrative burden for private sector clients; they would also limit businesses’ access to skilled flexible labour and ultimately drive down productivity.
“There is already widespread confusion about employment status law in the UK. Taxing more self-employed people as if they were employees – without giving them any of the employment benefits – would only add to this and further complicate this tangled issue. Therefore, with Brexit hanging over the country, IPSE’s response to the Government’s consultation was clear: don’t do it, and definitely don’t do it anytime soon.”
ATT - Dropped or deferred
The Association of Taxation Technicians (ATT) called for the proposed extension of ‘off-payroll' working rules to the private sector to be dropped or, failing that, deferred.
The ATT is concerned that self-employed people working through their own personal service companies (PSCs) may unfairly lose a significant part of their take-home pay under the plans.
Michael Steed, from ATT, said: “We do not feel that a convincing case has been made for the extension of these rules to the private sector. Our strong preference is for there to be greater and more visible compliance activity by HMRC to enforce the existing rules.
“We have not had a full compliance cycle since the public sector reforms were introduced, so cannot say for sure that they have worked as well as HMRC think in that sector.
“If HMRC consider that resource constraints mean that these rules have to be extended, we would strongly urge that nothing is brought in before 2020. Businesses will have enough upheaval to deal with in 2019 with the combined effects of Brexit and the rollout of Making Tax Digital. Small businesses in particular will need time to familiarise themselves with the rules and to get the right systems in place. HMRC’s research report acknowledges that the public sector reform was rushed and we worry that doing the same in the private sector would cause pain for businesses, contractors and indeed HMRC."
The ATT urged the Government to consider the wider picture such as work being undertake following the Taylor Review on Modern Working Practices, involving the taxation of employment verses self-employment rather than look in isolation.
In its submission, the ATT warns HMRC that in a world of long and complex supply chains, with multiple agencies introducing a great distance between the PSC at one end and the client at the other, there is a risk that the client will simply adopt the approach with the least risk of challenge by HMRC, to the detriment of the PSC and, ultimately, the individual doing the work.
There was much criticism of pubic sector bodies who took a 'blanket' approach to assessing contractors' status, and ATT is concerned is that clients will decide that the off-payroll rules apply in a greater number of situations than they truly do and that, unless the PSC has a very strong bargaining position, they will not be in a position to challenge such decisions.
Where the individual and their PSC disagrees with a client’s decision as to their classification, there is no right of appeal at that time to HMRC because the tax authority’s view is that this is a dispute between the client and worker which must be resolved between them.
IR35 - Extending off-payroll rules to the private sector could be the straw that breaks the camel’s back, says ARC.
ARC - straw that breaks the camel's back
Adrian Marlowe, chairman of recruitment group Association of Recruitment Consultants (ARC) said, “Although there is an issue of non-compliance which needs addressing, the proposals as they stand unnecessarily penalise the UK’s thriving contractor workforce, the contractor supply sector and, most importantly, hirers.
“The evidence on which HMRC bases its proposal is inadequate and certainly insufficient to justify its argument for extension. There has been no full impact assessment and use of the online tool CEST, which has been heavily criticised, remains open to question.”
ARC challenged various aspects of the public sector rules last year; its complaints were to be used as evidence in a Treasury Select Committee enquiry in April 2017, but this was abandoned due to the calling of the last election.
Mr Marlowe said: “Those complaints remain live; there was no independent scrutiny of the public sector tax proposition before its imposition, contrary to normal practice, yet the current consultation proposal is based upon it. Also in ruling other options as out of scope, the consultation is unnecessarily limiting given the potential impact. Adding all of this up it appears that HMRC intends to proceed regardless.
“Whilst it’s easy to be negative, there is an issue to be addressed and we encourage HMRC to consider other options that rely on a more traditional position.”
ARC suggests that the IR35 tax rules should apply as the default, but allowing the contractor to establish otherwise for any assignment, perhaps even by using the CEST tool. ARC argues that when combined with a percentage payment on account by the engager, this reversal of the test retains the principle that contractor tax responsibility lies with the contractor.
Mr Marlowe said: “Our suggestion addresses the reasons for the extension, provides HMRC with a significant income stream to meet the claimed tax avoidance, but without the risks, confusion, lack of clarity and onerous implications of HMRC’s plan.”
ARC is also concerned about timing, proposed to be for April 2019. Mr Marlowe concluded: “With uncertainty surrounding Brexit being a real and present danger, an early and insufficiently considered extension as HMRC intends may further unsettle the economy, and even be the straw that breaks the camel’s back for hirers that have the option to use or transfer workforces outside the UK.”
Qdos - Uncertainty
Contractor tax specialists, Qdos called for the wider implications that IR35 reform could have on the entire UK economy to be considered - particularly in the light of the challenges due to Brexit uncertainty.
In the IR35 consultation, the Government promised to review the impact of last year’s public sector changes which, if extended to the private sector, would see 5.7 million businesses responsible for determining contractors’ IR35 status and liable for any incorrect decisions.
Qdos Contractor CEO, Seb Maley, said: “Following public sector reform, contractors continue to be wrongly placed inside IR35 - a mistake which risks the liability of the businesses engaging these workers and sees contractors pay similar taxes to employees without receiving any employment rights.
“To extend reform when the dust clearly hasn’t settled on public sector changes would be short-sighted. The Government must prioritise sorting the chaos caused by public sector reform before announcing private sector changes. And in any case, further reform would break the Government’s promise to support small businesses.
“Should the Government press on with changes and with it, perhaps lose the support of contractors altogether, a 2019 roll-out would be premature. Engagers must be given time to equip themselves with the skills and experience needed to make accurate IR35 decisions on a huge scale.”
For more information about all aspects of IR35, including the controversial IR35 reforms see Shout99's News on IR35 section.
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Susie Hughes © Shout99 2018