Tax simplification unit ‘not consulted’ about complex IR35 reforms

A Treasury-commissioned body set up to simplify taxation has never been asked by the government how to make “complex” IR35 reform easier for businesses or individuals.

The Office of Tax Simplification has not even submitted its view about the reform, meaning it has had “no role” in the new off-payroll rules, its director Bill Dodwell admitted yesterday.

“We were not consulted as part of the review”, he revealed, referring to HMT’s PDF, but also in reply to whether the OTS has had a general say on simplifying the reform’s tools or implementation.

'Odd'

Asking the question, Lord Bridges -- who was quizzing Mr Dodwell as part of the probe by peers into the off-payroll rules, said he found HMT’s failure to consult the OTS “odd”.

“Sitting in the Treasury, you have an independent adviser on tax simplification…[amid] lots of noise…about this being a very complex process, but they [HMT] haven’t walked down the corridor to ask you for your views?”

It was a ‘no’ from Mr Dodwell, formerly head of tax at Deloitte.

Not that he sounded like he regrets not being officially approached. “I think what they have produced is an announcement of operational policy.

“And that is something that is very much a matter for HMRC,” he said.

“And not really something where we at the Office of Tax Simplification would get heavily involved.”

'Private talks'

But according to his reply to Lord Bridges, his OTS was not involved at all (save perhaps “private” talks with HMT which the Tory peer suggested but Mr Dodwell didn’t corroborate).

Even if those talks did occur, they were probably to tell the tax simplification unit to stay uninvolved, suggests Rebecca Seeley Harris, founder of ReLegal Consulting.

She told ContractorUK this morning: "This is less a case of the OTS not being asked to review IR35 [and more a case of it actively being told not to], because when I was a senior policy adviser at the OTS, we were warned not to include IR35 in any of our reviews.

"Those reviews were the Employment Status Review of 2015; the Small Company Review of 2016 and the Gig Economy Review of 2017.

"This instruction to exclude IR35 was despite the fact that I made it very clear that it would make sense to include IR35."

'We cannot'

Elsewhere in his evidence, Mr Dodwell of the OTS declined to get involved in two other areas.

First, Lord Forsyth asked for an alternative to IR35, to which Mr Dodwell replied, “No we cannot provide a draft.”

The negative answer earnt him wry smiles and a few audible gaps, given that he had just finished a long list of the rule’s shortcomings.

Second, after saying HMRC’s Standard Costs Model is outdated to imply he believes that £14.4m price tag is a “low” implementation estimate, he dodged an offer for the OTS to improve it.

'Not easy to see how a better job would be done'

The offer came from Lord Tyrie, who asked the OTS director: “Thinking about which bits of the tax system might need improvement, don’t you think this is something you might want to turn your minds to, as an institution?”

“Erm…thank you. I’ll take that away if I may,” came Mr Dodwell’s reply. “[But] it’s not easy to see how a better job would be done, other than by spending quite a lot of money”.

Later, Lord Tyrie tried again – exactly as he did in asking Mr Dodwell to rate the complexity of the reforms on a scale of one to 10, but which no numerical answer was provided in response.

'Close to an OTS promise'

“Well,” said the Tory peer, jokingly but potentially a bit fatigued having asked Mr Dodwell for a number, twice, both times in vain, “we came close to a promise from the OTS.

"[A promise] that they were going to look at how to improve all of this [HMRC forecasting]. Even though it’s very difficult.”

Smiling, polite but non-obliging Mr Dodwell replied: “I shall take lessons.”

Then, Lord Forsyth closed the session, which earlier heard Lord Rowe-Beddoe describe the introduction of the new IR35 legislation from April 6th 2020 as “horrifying.”

Other standout statements at the fourth oral evidence session of the Lords’ off-payroll inquiry related to:

Feasibility

“It’s perfectly possible for engagers to know whether the ultimate relationship they have [with PSCs] is one of quasi-employment or not.” (Bill Dodwell)

Cause and Effect

“HMRC’s demand that something is done about the growth and explosion of freelancing and the amount of tax avoidance that’s been going on…[leads us to a] position that ‘something must be done.’ And this [the April 6th framework] is the best that they’ve been able to come up with. Is there a better [way]? (Lord Monks)

“I’m not sure that there is quite such an absolute difficulty [in assessing the spectrum of contract or freelance workers accurately under IR35].” (Bill Dodwell).

Fairness

“The Treasury believe that these measures will bring greater fairness between employees and PSCs. [Employment rights of the latter workers] are just being ignored. That’s rather important, isn’t it? Sorry, I just find it horrifying when I hear you saying these things about legislation [which is just about to drop].” (Lord Rowe-Beddoe).

Rights

“That pre-supposes that the person providing the services is agreeable to doing that [becoming a Fixed-Term Contract Employee] .” (Lord Forsyth)

“Yes of course. But what that person gains are the employment rights of holiday pay, sick pay and all those other things that typically a contractor would not get”.(BD)

Benefits

“In some ways, once this [new system of IR35] is up and running, then there is the opportunity for efficiencies through that. The other aspect of that is, and although I accept that transition is always going to be difficult, ultimately, individuals will find it easier to know where they are [in terms of their IR35 status].” (BD)

The 5% allowance removal

“There was a 5% allowance. And that’s disappeared. I find it difficult to understand. Because actually, more of what used to be done by HMRC is being passed onto others and the allowance is disappearing. What is the logic of that?” (Lord Forsyth)

Contractors

“[There is going to be a] move in who’s supposed to operate it [IR35] from one set of people to another. That’s all we’re doing here. We are not simplifying. Arguably, you are simplifying [it] for the thousands of contractors at the cost of the smaller number of employers. Once you’re through the transition, that may be true.”(BD)

Implementation

“One company [I visited] was struggling because the three contractors that they had were walking away. So what they [the company] was then doing was looking at contracts – how contracts could be worded to perhaps use CEST to come out with the conclusion that they wanted i.e. outside IR35.” (Expert witness Karen Thompson, board member of Administrative Burdens Advisory Board).

Tax system/ simplification

“The rules are very complex. So, ‘does it [IR35] work or has it worked as well as it could have been?’ Then, ‘No, I don’t think it has.' But that’s down to some of the complexities.” (Karen Thompson).

“No, it’ not a simplification [measure]. It’s to raise more money and to put the responsibility onto engagers who are better placed to handle it [the IR35 status decision].” (BD)

“It was Colbert who I think said that the purpose of a good tax system is to raise the maximum amount of money with the minimum amount of hissing.” (Lord Tyrie)

“There is a certain amount of hissing, for sure. The question is whether this is a transition hiss and whether it will carry on in the medium-term. My suspicion is that some of the hissing is down to, really; because some people would rather not pay some tax and national insurance”. (BD)