HMRC unveils private sector IR35 reform consultation

The new off-payroll regime in the public sector whereby clients instead of PSCs decide IR35 status will extend to the private sector, a Treasury-HMRC consultation is finally proposing.

As widely expected, extending the April 2017 rules to all PSCs to tackle their “endemic” flouting of IR35 -- at an estimated cost of £700m a year, is the government’s “lead option”.

But the consultation adds “no decisions have been made;” says “alternative approaches” are sought, and asks 34 questions, many about how to ‘vary’, ‘adjust’ or ‘improve’ the rules.

“This reads more like a cry for help than a consultation document,” said David Kirk, a charted tax adviser who specialises in IR35 and employment status.

“Its main sections are [about] evaluating the effectiveness of public sector reform; [looking at] ‘compliance challenges….’ and [weighing up] ‘options to tackle non-compliance’”.

'Pinch of salt'

Also speaking to ContractorUK, the boss of David Kirk & Co took issue with a study HMRC has unveiled in the document to (it says) keep “learning” about implementation of the reform.

“[HMRC] acknowledges there were problems but suggests that [the study found], they have now largely been sorted,” he said. “This will be taken with a pinch of salt by those ‘in-the-know’”.

A pinch potentially -- and a punch already. “We disagree that public sector compliance has improved since the reforms were implemented,” shot back industry body the FCSA.

The body disputes a key finding of the HMRC-commissioned study -- that IR35 compliance is up, because 58,000 extra public sector workers have paid income tax/NICs since April.

'Not substantive proof'

“All that we have seen is an increase in numbers on-payroll, which is not substantive proof that they should be there at all,” the Freelancer & Contractor Services Association said. 

Julia Kermode, FCSA chief executive, added that such extra people on the payroll had likely only emerged due to “inaccurate blanket or role-based decisions” by engagers.

Again however, the HMRC study is at odds with the consensus. In fact, despite a top QC and the IHPA saying blanketing is widespread, the study claims 93% of bodies test case-by-case.

Walkouts are another point of disagreement. “[Our] research [showing] large numbers of contractors are walking away from the public sector…paints a very different picture,” says IPSE.

'Shameful'

The contractor group not only challenges HMRC’s finding (seven in 10 bodies claimed it was not more difficult to recruit off-payroll contractors post-April 2017), but the study as a whole.

IPSE’s boss Chris Bryce said: “It is shameful that the government did not publish the external research into the impacts of the public sector changes prior to announcing this consultation.”

A closer look at the study, which involved 117 bodies between August and October 2017, reveals that other doubts may surface relating to how HMRC characterises the findings.

For example, HMRC says only “a minority” of public bodies reported recruitment difficulty, but the researchers (IFF Research) actually say a “notable proportion” suffered difficulty.

There also seems to be a pattern to how negatives are presented, with HMRC firstly citing a problem; then minimising it such as by saying it was only initial, before ending on a positive.

Notably, “findings suggest that the main difficulties were related to familiarisation” with the rules -- albeit in “the early stages,” yet the abilities to administer them “improved over time.”

'Must be shelved'

Observers also say that presentational differences aside, there are not many entirely positive findings to reassure the private sector, or the public sector where the ‘the jury is still out.’

“Until public sector bodies prove they can make accurate IR35 decisions on a large scale, plans for the private sector must be shelved,” urged IR35 advisory Qdos.

The Association of Independent Professionals and the Self-Employed (IPSE), said: “For the government to even consider introducing the ill-judged changes to IR35 in the public sector to the private sector, before their full impact can be truly analysed, is outrageous.

“How can the government hold this anti-business consultation when it won’t even know the full tax implications of the changes made last year until people file their tax returns in January 2019?”

'Well-known challenges'

But even if a longer timetable was put in place (and HMRC now admits that many bodies wanted more time to prepare for April’s rules), the IR35 enforcement equation would still be unsolved.

“The compliance challenges in the private sector are well-known, but one crucial one is omitted here,” said Mr Kirk, referring to the 32-page consultation, published on Friday.

“This consultation came out only a day after [a judgment was published showing] HMRC lost another [IR35] case in the tax tribunal.”

The FCSA reflected: “HMRC’s track record on IR35 is dismal,” it said, seeming to allude to two victories for taxpayers this year to HMRC’s one (taking it to 12 wins each since 2000).

The association added: “It’s unthinkable that it [HMRC] can expect end-hirers to take responsibility for IR35, when it is proven that they cannot implement it properly themselves.”

'If not even HMRC can get it right ...'

IPSE echoed: “[Just the other day], an IT contractor successfully argued in court that HMRC had incorrectly determined that he was caught by IR35.

“If HMRC, with all its resources and expertise, cannot make an accurate IR35 determination, how can it expect anyone else to get it right? IR35 is so complex, not even HMRC can accurately determine who it applies to.”

The Revenue uses the consultation to imply that in the private sector, it’s done its best. It says it has carried out more IR35 enquiries; formed two specialist units and improved guidance.

“However, despite these improvements, non-compliance in the private sector remains extensive and continues to grow”, HMRC said, forecasting a £1.2bn loss by 2022/23. 

“At present, when making enquiries into non-compliance in the private sector, each PSC needs to be dealt with individually, even where there are numerous workers engaged and working in the same way for a single client.

“This is clearly very inefficient and results in duplication of effort. A typical successful compliance case of this kind can take around 18 months from start to finish.”

'Greatly improving the efficiency'

Under the April 2017 framework, almost the reverse is true. Specifically, HMRC can now get “information on a large number of PSCs at once” by approaching a single organisation.

So the reform is “greatly improving the efficiency of the compliance process,” as a single enquiry into multiple off-payroll workers can be run by HMRC, “if necessary.”

This ‘one-stop-shop’ for HMRC is partly why some £410m in additional revenue has been raised, counted by the exchequer as having come in since the reform took effect last April.

“The government’s assessment is that the public sector reform has been successful both in increasing tax compliance and resolving the compliance challenges”, the consultation says.

“Endemic non-compliance for off-payroll engagements in the private sector….[is why] the government considers that the off-payroll working rules for the private sector are likely to require reform”.

'Burdensome for agencies'

Whether it is the straight extension of the April 2017 public sector framework, the solution that contractors and others can feedback on should meet four objectives, adds the document.

But one of the objectives -- “not be disproportionately burdensome…. [for] agencies” appears to be in danger of not being met, if HMRC gets to iron out a quirk in the new framework.

“HMRC has found that some agencies have disregarded the public authority’s determination about the worker’s employment status and chosen not to operate PAYE,” the consultation says.

“The agency should not disregard the employment status determination made by the public authority.

“An incorrect decision that the rules should not apply could represent a failure by the agency to operate PAYE. HMRC could, having fully explored the reasons, look to use its powers to recover the tax due through compliance activity.”

Respondents to the consultation are therefore asked if penalties should be considered, in Question 9: “Should an obligation be placed upon the fee-payer to adopt the client’s conclusion and there be sanctions for failing to do so?” 

'Leave no stone unturned'

Recruiters will likely be hoping that the consultation is, as tax specialist David Kirk suggests, a ‘cry for help’ or input, not a cut-and-dried situation. And Qdos’ chief executive Seb Maley sounds optimistic that it is the former.  

“This consultation is an opportunity for the government to thoroughly and honestly review the impact private sector reform could have on contractors, engagers and the many other parties in the supply chain,” he said.

“HMRC has been adamant last year's changes in the public sector have been a success, despite many indicators suggesting otherwise. We urge the government to take this consultation seriously and leave no stone unturned.”

In the consultation, the Treasury seems to dismiss those indicators as “anecdotal.” But its financial secretary Mel Stride appears aware of the expectations upon the consultation team.

“It’s very important that we recognise the hard work of contractors across all sectors, who contribute to our growing economy.

“But it’s also right that we have a fair tax system that balances efficiency and simplicity for taxpayers, while also supporting our vital public services.”

He also said: “That’s why we’re consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance.

“We want to learn from our experience in the public sector and so are consulting on what steps we could take to reduce the admin burden and ease implementation, if we were to take forward similar reform in the private sector.”

'Out of scope'

One lesson learned already is the need for a longer lead-up. “The government acknowledges that many public authorities would have preferred more time to prepare and adapt”, the consultation says, implying any April 2019 commencement may still be premature.

But the consultation says ‘out of scope’ as solutions are the Freelancer Limited Company; Minimum Contract Lengths; Clients Paying Employer NICs or a Flat-Rate Withholding Tax.

Solutions to private sector IR35 flouting that officials are interested in, aside to the “lead option” of extending the April 2017 framework, are a record-keeping regime and a supply chain checks and assurances system.

The scant detail on these (compared with the abundance of detail about superimposing the 2017 framework), and the nature of the questions asked under them (‘Would the system “be proportionate?”’), will fuel fears that the government’s mind is already made up.

'The same problem'

Wording in the consultation seems telling too. Officials say they deem IR35 reform of the public sector “successful,” and say the private sector is simply suffering from “the same problem” that the public sector had before the reform.

“As for the options for a solution,” reflected Mr Kirk, “it is a pity that all the radical proposals floated in the last few years that might actually work have been dismissed as ‘out of scope’.

“If this means that the only solution actually is to rollout the public sector reforms to the private sector, I fear for the future. They do really need to be more imaginative.”

The consultation, ‘Off-payroll working in the private sector’ was unveiled (next to a factsheet) last week after a promise to consult in late 2017 but was foreseen in 2016. It closes in August, with responses to be posted/emailed, ahead of their publication later this year.