Following the House of Lords Finance Bill Sub-Committee opening its inquiry into the Government’s proposal to extend the off-payroll working rules to large and medium-sized organisations in the private sector from April 2020 on the 4th February, they met with representatives from ICAEW, ACCA, ICAS, CIOT and LITR on the 10th February.
The aim of this meeting was to hear evidence however it was encouraging that by the time of the sub-committee meeting Lord Forsyth had already received around 300 emails in response to his call for evidence, although perhaps unsurprising given the impact of the reforms on the UK’s contingent workforce.
If you’d like to watch the whole recording of the meeting, you can do so here. However, our Director of Operations, Tony Howell, has picked out the main topics from the meeting and shared them with us below:
Are businesses ready for reforms or do they need more help?
The general sentiment was that large businesses have placed a significant amount of effort into trying to arrange their systems and processes to comply with the rules. Concerns were cited regards to how businesses had been supported with little education and the outcomes from the roll out of the rules in the Public Sector still not fully clear. Full compliance with the new rules is beset with difficulty as the rules remain unclear. Whilst a delay would be preferable all representatives relayed that they understood the Treasury’s need to press ahead.
Is the CEST tool fit for purpose?
It was recognised during the meeting that if it were easy to determine employment status that it would have been achieved and as such the CEST tool is a blunt instrument.
Whilst HMRC appeared to be making improvements to accuracy and usability ensuring questions were easier to understand, it remains far from perfect. Guidance is still not obvious and without that the tool may be used incorrectly. Further, it still excludes Mutuality of Obligation, the most cited point when cases are brought for appeal. It was estimated that in 15% of cases the CEST tool is unable to make a status determination and the current system of directing the user to contact HMRC is inadequate.
Is there a compliance burden on employers?
The representatives explained that it was extremely difficult to put a cost on the compliance burden but believed HMRC had an overly simplistic view of it. HMRC is often quoted to estimate that 90% of contractors do not apply the IR35 rules correctly however what is not understood is whether that is through incompetence, ignorance or active avoidance. In our experience many contractors seek to apply the rules correctly and we would welcome further evidence to support HMRC’s figure. Further the Committee were reminded that the IR35 legislation as anti-avoidance legislation was intentionally drafted to be broad, this increases the complexity and subsequent difficulty in compliance.
HMRC have suggested that the cost of implementing the reforms is £14.4 million however the witnesses all agreed that this figure was far too low, although the real figure is almost impossible to predict.
Is the appeals process adequate?
The committee discussed that there is an imbalance of power as things stand and steps should be taken to address this. Whilst the fact there is an appeals process at all is a welcome addition, (there was no such provision included in the public sector reforms introduced in 2017) it is inadequate. An independent status disagreement process was proposed in addition to a time limit to start the disagreement process.
Have there been blanket determinations?
Given the complexity of applying the employment status tests this was perhaps to be expected, particularly within the banking sector. Reference was also made to the impact that the implementation of these rules had in the Public Sector, causing harm to the NHS who faced problems with recruitment and resourcing.
Is there a risk that contractors will unwittingly enter tax avoidance schemes?
There are concerns that there are still tax avoidance schemes masquerading as compliant umbrella companies offering up to 90% take home pay. The fact that HMRC are not taking action to close these schemes down means that contractors that are no longer able to operate through personal service companies may unwittingly enter these non-compliant schemes. The introduction of the debt transfer provisions with the off-payroll rules effectively passes the responsibility to police the supply chain to the end hirer or first agency and the effectiveness of this is in question. HMRC have a blind spot to these dark arrangements and more needs to be done to tackle this.
What action is needed?
The representatives made several recommendations as to what steps should now be taken:
- Greater clarity on the rules, specifically questions that had been raised in the past required a response (and not simply to be made clear as the rules bed in)
- Real assurance from HMRC that any enforcement action would be proportionate, recognising the complexity of the rules, the limitations of the CEST tool to assess all circumstances and the lack of clarity that still exists.
- An independent dispute resolution process with a clear time limit for a contractor to begin the process.
- The alignment of legal employment status and tax employment status
Whilst a delay to the implementation is almost now certainly off the cards, the short-term recommendations put forward are pragmatic and hopefully place more urgency to addressing concerns around the lack of clarity that still exits.
The lord’s inquiry is due to close on 25th February, if you would like to contribute to the enquiry you can read more about the objectives of the inquiry here and make your own written representation.
If you have questions around the off-payroll reforms and how they could affect you, please speak with your accountant.
Update: at the time this article was written, the off-payroll (IR35) reforms were due to be implemented on the 6th April 2020. On the 17th March 2020, the UK government announced that it would be deferring the reforms to the 6th April 2021 to help businesses and individuals during the COVID-19 crisis.