Off-payroll recap: what the Treasury promised Vs what HMRC proposes
A 31-page consultation asking contractors to have their say on April 2020’s off-payroll working proposals to reform IR35 in the private sector has opened. It has 18 questions and is open until May 28th. You can email your input and/or answers here.
The document was mooted in late 2018, when the government said it would extend reforms made to IR35 in the public sector in 2017, to the private sector from 2020.
Now, HMRC is asking affected parties to input into that extension, presumably with such parties factoring in:
- An exemption to the 2020 proposals (announced at Budget 2018), and
- Three areas of the 2017 rules that the Treasury committed to improve (at Budget ’18).
The exemption is for small businesses, meaning that an end-user who is a ‘small business’ will not have to apply the 2020 rules unless it exceeds two out of three thresholds relating to:
- Employees (50 or more);
- Turnover (in excess of £10.2million)
- Balance sheet total (£5.1million, assessed based on the financial accounts for the period ending before each financial year)
The three commitments which the Treasury made in 2018 to improve the 2017 rules were to:
1. “Refine the design of the reform.”
(Source: Page 10 of this 2018 HMT document)
2. “Further explore options for the consequences of businesses failing to use reasonable care.”
(Source: Page 11 of the HMT document)
3. “Identify improvements to CEST.”
(Source: Treasury Off-payroll Working Policy Paper)
Commitment 1 is the hardest to gauge whether the consultation, published yesterday, achieves it. A ‘refinement’ in one party’s view can be an ‘oversimplification’ in another’s.
Commitment 2, for using much more precise language and having a specific aim, is easier to assess whether it has been achieved by the consultation. There is clearly an attempt to.
In fact, HMRC has an entire chapter in the consultation entitled, “Helping organisations to make the correct status determination and ensuring reasonable care.”
In place of any ‘exploration’ around “reasonable care” or its “consequences” however, there is instead a proposal:
A -- Require the client to directly provide the off-payroll worker and the fee-payer with the reasons for the status determination on request.
Why? “The government thinks” this requirement will “go some way to address…concern” from contractors that the “full circumstances of the engagement have not been considered, or because they think the client has not taken reasonable care in reaching that determination.”
Where? At consultation question 13, the Revenue asks contractors and other parties:
Would a requirement for clients to provide the reasons for their status determination directly to the off-payroll worker and/or the fee-payer on request where those reasons do not form part of their determination impose a significant burden on the client? If so, how might this burden be mitigated?
And at consultation question 16, also open for contractors to answer, the Revenue asks:
Does the requirement on the client to provide the off-payroll worker with the determination, giving the off-payroll worker and fee-payer the right to request the reasons for that determination and to review that determination in light of any representations made by the off-payroll worker or the fee-payer, go far enough to incentivise clients to take reasonable care when making a status determination?
Commitment 2 seems further addressed by a another HMRC proposal in the consultation:
B -- Potentially require clients to put in place an internal system to allow for their determinations of contractors’ IR35 status to be challenged by contractors.
Why? The government says that the introduction of a client-led status disagreement process (“based on a set of requirements set in legislation”), will allow organisations to tailor the process to fit in with their wider business processes.
The government also says it “believes” that the introduction of a client-led status disagreement process will mean that “fewer off-payroll workers will need to use end of year processes to challenge the status determination.”
Where? At consultation question 14, the Revenue asks:
Is it desirable for a client-led process for resolving status disagreements to be put in place to allow off-payroll workers and fee-payers to challenge status determinations?
And at consultation question 15, the Revenue asks:
Would setting up and administering such a process impose significant burdens on clients?
Seeming to refer to proposals A and B, HMRC says: “This consultation introduces a variety of ways in which individuals can raise their concerns about their status determination directly with the client that issued it. It is the government’s view that this dialogue will inevitably result in the client taking reasonable care when reaching its final view on the status determination of the engagement.”
Commitment 3 from the Treasury relates directly to that “status determination”, as it involves CEST. But no specific ‘improvement to CEST’ is pinpointed in the HMRC consultation.
In place of such improvements, or any new proposals related to Commitment 3, is a range of pledges to hone CEST, or reminders that such work is underway and/or will happen.
For example, the government will “improve CEST guidance,” and “enhance the service”, but the consultation gives no detail on how it will improve/enhance CEST.
Why? The unspecified improvements will be made (under no provided timetable) to help HMRC’s “customers make employment status decisions” and to let clients do so confidently.
The enhancements are necessary, HMRC implies, due to “concerns about CEST’s ability to take account of existing employment status for tax case law.”
There are also concerns about CEST’s ability to “reflect the complex nature of the private sector.” Many other criticisms of CEST remain. The consultation does not acknowledge them.
Where? Out of the 18 questions posed to affected parties, which range from modifying when the NIC/tax liability should be transferred, to issues like pensions, not one asks about CEST.
