“We’re not ready” screams the contracting sector in response to IR35 Off-Payroll consultation.
As per standard practice, the Government launched a consultation earlier this year on the extension of IR35 reforms – officially known as “Off-Payroll” – into the private sector. That consultation ended two weeks ago, and the response from the contract sector was largely unified in calling for at least another year’s delay to the proposals.
With the consultation responses being mainly critical of the proposals as-planned, we take a look at some of the various responses from professional bodies, trade associations and businesses, and examine what their objections were:
The Law Society – the professional association for solicitors in England and Wales believes that Off-Payroll will shift “significant risks onto taxpayers” and “should be reconsidered.” The Society’s response argues that the proposals will result in an increased number of disputes over IR35 status due to end-clients facing liability risk for making incorrect assessments which will create a tendency for the client to make an “employed” assessment where there is any doubt over an IR35 status. This echoes many other critics of the Off-Payroll proposals.
The Society notes that one of the stated aims of the Off-Payroll consultation is to learn lessons from the implementation of Off-Payroll in the public sector in 2017, but says that “the proposals fall short of this aim,” with the main stumbling block being the inherent complexity of making IR35 assessments. The chaos caused by Off-Payroll at the BBC is cited as an example of this. They suggest that where the correct procedures have been followed, tax should not be chargeable in the event of an erroneous IR35 assessment, and that HMRC should provide advance IR35 rulings upon request. The response also implies that HMRC’s online IR35 status checker CEST will remain unfit for purpose without “additional investment”. An alternative system is also proposed based on registering gross payments with HMRC – the Chartered Institute of Taxation made similar recommendations – for which the CIS construction scheme and non-resident landlord scheme could provide useful models.
KPMG – the “big four” auditor and professional services firm believes the Government should delay the expansion of Off-Payroll into the private sector again “unless draft legislation, comprehensive HMRC guidance and an enhanced Check Employment Status for Tax (CEST) tool to support status determinations in the more complex private sector are made available in good time.” KPMG also singles out CEST as being of particular concern, calling for it to be updated to reflect recent case law and fine-tuned to drive down the amount of ambiguous results to less than the current level of 15 per cent. Like The Law Society, KPMG forecast a significant increase in status disputes if the proposals were to be implemented in their current form.
The main recommendations made by KPMG are the inclusion of a defence of “reasonable care” for clients and agencies, who, as things stand, will be open to have unpaid tax and National Insurance debts transferred to them in the event of a default. A reasonable care defence will enable any compliant recruitment agency or client to operate with more certainty, and will reduce the likelihood of a tendency to make “inside IR35” determinations in order to mitigate financial risk. HMRC should also make clear exactly what supporting information end-clients will be required to give to members of the contingent workforce when they inform them of their IR35 assessment result, and should undertake a review of the Off-Payroll regime around 24 months after implementation to allow for improvements to be made once it becomes clear how well the organisation is functioning.
ACCA – the global professional body for accountants, the Association of Chartered Certified Accountants, also calls for a delay to the implementation of the proposals, citing “heightened business uncertainty” and an underperforming Check Employment Status for Tax tool as major factors. A delay would also allow for more detailed deductions on any unintended consequences or implications that the Off-Payroll proposals may have on the private sector.
In news that may alarm self-employed people, in a survey of private sector businesses, 29 per cent told ACCA that they would reduce their reliance on Off-Payroll workers in order to mitigate the disruption that the new rules will cause.
The ACCA recommend extensive testing of CEST from late 2019 until their proposed April 2021 implementation date, with 67 per cent of their members surveyed indicating that their organisation will become reliant on CEST to make IR35 assessments under Off-Payroll.
It also challenges the Government’s proposals for a client-led dispute process, arguing that dispute procedures are likely to vary from client to client, thus not delivering “consistency across organisations” as the consultation suggests. Only 60 per cent of the professional body’s surveyed members believed that they would feel able to challenge contentious IR35 assessments, with the consultation response quoting one ACCA member as saying “If you want work, you have to do what the client wants otherwise they let you go and hire someone else.”
ACCA’s policy manager for Europe, Lilly Aaron, has urged for a delay to the proposals: “ACCA will always support anti-avoidance measures and work with government to make sure business is clear about paying the tax it owes.
“On the surface this legislation aims to tackle contrived working practices that may disguise the true nature of the relationship between a worker and client. In practice however, this reform could create a complex web of new rules and liabilities throughout supply chains causing confusion over employment status and where tax liabilities rest.
“Two years on from implementation there is a lot of lessons to be learned from these rules being introduced to the public sector. While the public sector faces having its current rules adjusted, it is essential that we get this right the first time for the private sector to give businesses some certainty. Now more than ever it is important to conduct thorough impact assessments, at a time when many organisations have diverted resources away from further recruitment and business growth to focus on Brexit contingency planning.”
ICAEW – The Institute of Chartered Accountants in England and Wales is another professional body calling for a delay to the implementation of Off-Payroll, arguing that large organisations will need time to tweak their ERP and Payroll systems in order to distinguish between deemed employees and true employees. They also suggest that many large enterprises operate a global HR system, making it impossible to simply alter the UK system, because there isn’t a UK system – therefore any changes will need to be tested for downstream impact in every geography. Changes to global HR systems of this scale are expected to take anywhere up to two years.
The professional body also believes that the definition of “small” businesses – who will be exempt from the Off-Payroll rules – is too complicated and should be viewed as a temporary measure, and, like KPMG, suggest that the transfer of tax liability proposals “could produce unfair results.”
Echoing several other concerns about the client-led dispute proposals, the ICAEW said “there needs to be a real-time, independent statutory method of appeal.”
CIOT – The Chartered Institute of Taxation, whilst noting that the consultation does not ask respondents to consider whether the Off-Payroll proposals are the right approach to tackling avoidance via limited companies, reiterates its suggestion to scrap Off-Payroll and instead introduce a system whereby clients and agencies have to e-file records of payments made to Personal Service Companies (PSCs) on a regular basis, thus providing HMRC with the information it needs to enforce IR35 effectively.
The Institute also notes the Government’s Good Work Plan published in December which announces key changes to employment law, employment status tests and agency regulations, and recommends that “the IR35 issue, the taxation of the employed v self-employed and labour market law should all be viewed through the same lens and considered together,” with the Good Work Plan offering an opportunity to develop a clearer, more holistic and more consistent system, and potentially rendering IR35 reform, in the form of Off-Payroll, obsolete.
The CIOT were highly critical of CEST, which it believes businesses are likely to become reliant on. It calls for an improved CEST assessment tool to be available by October 2019 at the latest. The Institute also believes further guidance is required on defining exactly who the end-client is for the purposes of the regulations, and suggests that the test for “small” businesses may actually encourage smaller firms not to hire contract workers in order to stay below the limit to qualify for exemption.
The CIOT’s consultation document can be found here.
APSCo – The recruitment industry body APSCo has chosen not to publish its response to the consultation, but in a press release it indicated that a large number of its members were concerned about the impending rules and took an active involvement in the formulation of APSCo’s response, with 87 recruiters attending three working groups across the country.
Common concerns shared by APSCo members throughout the process included where liability sits in the supply chain, when and how status determination should be made and communicated to recruitment firms and contract workers, the likely increase in demand for fixed term project/statement of work services and how each recruitment agency can best prepare for the roll-out.
Commenting on the level of engagement, Tania Bowers, general counsel at APSCo, said: “APSCo members certainly stepped up to the plate in terms of engaging with the consultation and I’d like to thank all those who took the time to get involved. While the professional recruitment community generally maintains that extending public sector rules to the private sector is still not a preferred option and remain concerned about the industry and its client base being ready for next April, through engaging with the consultation process, we can at least influence how these changes are implemented.
We hope that HMRC has the good sense to consider, and take heed of, the concerns and advice offered by those who know what’s happening on the ground. We look forward to seeing how our insight will shape the draft legislation which is expected to be published at the end of next month.”
CIPP – The Chartered Institute of Payroll Professionals also expresses concern over Off-Payroll’s implementation timescale in their consultation response, saying the timescale is “not reasonable due to the inevitable (and ongoing) delays caused by the current political upheaval as a result of our exit from the European Union.”
The Institute notes the number of organisations that are likely to be affected and calls on HMRC to undertake a “significant education programme” to enable businesses and advisers to be aware of and comply with their new obligations.
“Guidance needs to be timely, clear and accurate, it also needs to speak to the increasingly wide audience that this subject will now attract and it needs to ensure that each party affected by these reforms are made aware – particularly those who may think that they are not captured by the latest reforms.”
The Government is now analysing the feedback from the consultation and will formalise the proposals into draft legislation which is expected to be published this summer. Whether any of the proposed amendments will be incorporated into the final rules remains to be seen.
19th June 2019.
