Concerns about the extension of IR35 changes in the private sector have prompted MPs to table a parliamentary Early Day Motion (EDM) opposing the new rules, which are due to take effect in April of next year.
The IR35 changes, known as the ‘Off-Payroll’ rules, were introduced in the public sector in April 2017, but instead of representing a simplification of the complex IR35 rules, they simply move responsibility for them away from the contractor and onto their service company. The new rules caused chaos in the public sector and left a substantial number of independent contractors overpaying tax and National Insurance.
HMRC has said, however, that smaller organisations will find it difficult to make the changes which means that if an employer is small, the contractor will still determine their own IR35 tax status. HMRC will follow the Companies Act definition of a smaller company when deciding which organisations should be exempted from the IR tax.
The BBC, which hires around 60,000 freelancers a year, was left reeling after attempting to implement the rules in accordance with official guidance. Many of their presenters had been forced to set up limited companies years earlier only to find that the new IR35 tax rules procedure left them categorised as “deemed employees” subject to dramatically increased rates of taxation.
Other public authorities, such as the NHS, Network Rail and the Met Office, have apparently been operating “blanket assessments” which classify large numbers of temporary workers as employees without having their individual circumstances assessed.
Many industry experts blame Check Employment Status for Tax (CEST), an online tool developed by HMRC to assist employers with the bulk assessments, which has been criticised as “too simplistic,” “hopelessly unreliable” and “not fit for purpose.” The EDM, tabled by MPs, notes that CEST “routinely does not provide clear answers and raises concerns that there could be a blanket application of the rules due to the poor performance of this tool.”
Even HMRC has admitted that CEST needs improvement. They released a document alongside the announcement of the date, stating that IR35 changes would be expanded into the private sector at Budget 2018. However, no updates to the tool have subsequently been announced.
Early Day Motions provide an instrument for MPs to call the attention of the House of Commons to a particular issue, however they seldom become law and are rarely debated. The EDM opposing the extension of IR35 in the private sector, Early Day Motion 2379, tabled on 13 May, is currently supported by 13 MPs, including four Conservatives.
It’s not the only EDM relevant to contractors: Early Day Motion 1239 was tabled on 8 May last year, opposing the 2019 Loan Charge, and was signed by 152 MPs including 36 Conservatives. However, the policy went ahead as planned, taking effect on 5 April.
The Stop the Off-Payroll Tax campaign, led by contractor website ContractorCalculator.co.uk and launched on 14 May, is encouraging contractors that will be affected by IR35 changes to contact their MPs and lobby them to support the EDM: “Big thanks to MP [Ged Killen] for tabling the ‘IR35 Off-Payroll Tax Extension’ EDM in parliament – No.2379. We now need cross party support from @Conservatives @UKLabour @LibDems Pls share with your #MP,” the campaign tweeted.
IR35 has been intensely unpopular since its introduction in April 2000, mainly because the criteria governing who is affected (or “caught”) by the rules are highly complex, making it impossible to know with any legal certainty whether an individual contract should be subject to self-employed tax status or employed tax status.
This complexity also affected HMRC’s enforcement of the working rules, leading many freelancers to “do an ostrich” and simply ignore them. Each individual contractor is therefore taking an undesirable calculated risk that they won’t be audited for IR35 compliance. These workers are aware of their employment rights but, the IR35 regulations are a liability to their current rate of pay.
This game of cat-and-mouse continued for years, until revelations about the scale of tax avoidance in general in the early 2010’s created substantial political will for the Government to crack down on IR tax avoiders.
In July 2015, the Government published a discussion document on “how to improve the effectiveness of the existing intermediaries legislation, commonly known as IR35”. The document estimated that non-compliance with IR35 changes would cost the Exchequer £430 million in 2015-16. The implication was that the national contemporary IR35 enforcement regime was ineffective.
At Budget 2016, the form that IR35 reform would take was announced: to prevent contractors from wilfully ignoring the rules, responsibility for making IR35 assessments would be transferred to the end-client, with the “fee-payer” (usually recruitment agencies) assuming responsibility for making PAYE deductions at source for any contract that the client deemed to be “inside IR35.”
These changes were then rushed out to the public sector in April 2017 – presumably because the Government was particularly concerned with quashing tax avoidance amongst the workers on its own books – leaving Public Sector Bodies struggling to cope with their new obligations.
Critics of Off-Payroll cite failures of the public sector “trial” of Off-Payroll as a key reason for implementing the rules in the private sector in a more measured fashion, and indeed the extension of the rules to the private sector was delayed by 12-months at the 2018 Autumn Budget. However, since then, improved guidance on how to operate the rules has been lacking, and the flawed online CEST tool that was purported to make assessment easy has not been updated – and is still in beta.
At the same time, more evidence has emerged revealing mass-scale flawed assessments in the public sector, and confidence that the Off-Payroll rules will be seamlessly adopted by the private sector is at an all-time low, leaving many asking themselves whether the rules could signal the end of flexible working altogether.
The website of the Stop the Off-Payroll Tax Campaign can be found here: https://www.contractorcalculator.co.uk/StopTheOffPayrollTax
Phil Nicholson
21st May 2019.
