Contractors are being urged to lobby the Government, if they haven’t already, regarding possibly the single biggest regulatory change to the sector since the introduction of IR35 tax rules in April 2000.
The Government’s consultation on extending reforms to IR35 tax rules known as “Off-Payroll” into the private sector ends this evening, Tuesday 28th May, at 11:45pm.
The Off-Payroll rules shift responsibility for employment status assessment under the IR35 contractor tax legislation to the end-client, from self-employed people themselves. IR35-caught contractors will have PAYE income tax and National Insurance deducted at source by the “fee-payer,” which would usually be their recruitment agency.
The intention is to make it impossible for contractors to take a calculated risk that they probably won’t be audited by HMRC for IR35 and simply ignore it, whilst enjoying lower contractor tax rates. IR35 enforcement has proved difficult for HMRC, with the tax authority estimating that only 10% of Personal Service Companies (PSCs) operate the rules, and that non-compliance would have cost the Exchequer £1.3 billion by 2023/24 had nothing been done about it.
By making end-clients assess their contractors’ IR35 statuses, HMRC hope that only genuinely self-employed people will have access to lower taxation. However, opponents have expressed grave concerns that clients will instead seek to avoid the risks associated with getting the complicated determinations wrong, and will operate with considerable bias towards making “inside IR35” decisions.
Inside IR35 decisions can leave companies in breach of contract. The IR35’s incompatibility with contract law means that any employer attempting to comply with the tax rules could be susceptible to legal issues.
Adrian Marlowe, managing director of Lawspeed and chairman of trade body The Association of Recruitment Consultancies, believes that this may be part of HMRC’s plan. “The contracting sector should be alive to the fact that HMRC may be seeking to achieve this outcome,” he said in a recent blog post. “Whichever way you look at the public sector IR35 tax rules you cannot avoid the conclusion that risk of tax liability only arises in two scenarios: if there is a determination that a contractor is outside the IR35 rules, or if there is tax non-compliance in a supply chain where the determination is that the contractor is caught.”
Other critics cite HMRC’s flawed “Check Employment Status for Tax” (CEST) online tool as a key reason why the expansion of Off-Payroll into the private sector needs to be halted. CEST was launched to make it easier for clients to assess IR35 status, but has been heavily criticised for returning inaccurate results that are biased towards “inside IR35” decisions, an issue that caused chaos at the BBC when the Off-Payroll rules were applied to the public sector back in 2017.
Government consultations are a chance for shareholders and members of the public to react to Government proposals, suggesting amendments and improvements to the proposed legislative framework. The Government is under no obligation to follow such suggestions, but the more objections that are raised on a particular issue, the more likely they are to be listened to.
It is important that those taxpayers directly affected by the estimated taxes speak now before the consultation deadline ends tonight. At the very least, tax advice can be sought by self-employed people who might want to garner more information on the total tax they will pay at the end of the tax year.
The Chartered Institute of Taxation (CIOT) believes the proposed Off-Payroll rules are “administratively burdensome” and has suggested an alternative model: the client or agency paying a Personal Service Company would be required to e-file a report of payments made to PSCs on a regular basis (potentially combined with a CEST result). This report, combined with new questions on the self-assessment tax return, would enable HMRC to target IR35 audits much more effectively, thus greatly reducing the amount of total tax and National Insurance lost whilst freeing up business of an excessive IR35 compliance burden that risks “material collateral damage.”
This collateral damage is, of course, the estimated taxes that were unpaid by contractors before our current tax year (6 April 2019 to 5 April 2020). In many cases this has had a devastating effect on contractor accounting and finances.
The CIOT proposals were given to HMRC and the Treasury as part of the CIOT’s response to the 2018 consultation but were not taken up, with the Government arguing that IR35 audits are simply too involved to ever be truly effective:
“Enquiry and enforcement activity focused on individual PSCs is both costly and drawn out. The use of PSCs has increased in recent years, and the scale of non-compliance with the off-payroll working rules in the private sector means that compliance activity alone cannot solve the problem.”
However, in addition to lobbying MPs, contractors opposed to the proposals are also being urged to respond personally to the government consultation, before it closes at a quarter-to-midnight tonight.
Many believe the proposals, if enacted as planned, could have grave repercussions on the contract sector or potentially signal the end of flexible working altogether. HSBC has already announced that it will stop hiring contractors from September, a decision understood to be a direct result of the Off-Payroll proposals.
To respond to the consultation, the official email address is firstname.lastname@example.org.
The consultation document can be found here.
28th May 2019.