The 24th February saw another day of evidence at the Lords inquiry into the Off-Payroll reforms. Contractors and Freelancers were extremely well represented by Julia Kermode – FCSA and Andy Chamberlain of IPSE and others from the CBI, FSB, Independent Health Professionals Association, Producers Alliance for Cinema and Television and Oil and Gas UK.
The witnesses made some excellent points with strong evidence and without wishing to sound too optimistic the Finance Bill Subcommittee seemed well informed and took the concerns on board.
Our director of operations, Vic Kelly, again spent some time watching and summarising the review meeting so that you don’t have to. Read on as she shares with us the key points made during the review, or click here for her overview of the first evidence enquiry meeting:
Will businesses be able to manage and are they being provided adequate advice and support?
Unsurprisingly given the complexity of the IR35 legislation a straw poll following a recent HMRC webinar found 50% were not confident in their ability to make an accurate Status Determination, 49% had taken no steps to prepare for the reforms and 41% did not know whether they were engaging contractors through intermediaries.
What tweaks and improvements are needed?
It was offered that tweaks and improvements would not resolve the underlying issues surrounding the reform. Businesses need certainty and simplicity, neither of which has been delivered through the proposed reform. Further, HMRC’s understanding of the real value that the reform could achieve was contestable.
Perhaps understandably given the significant difficulty for end clients to arrive at correct determinations it was the view that reasonable care may not be being taken as supported by evidence including a survey undertaken by SThree, a market leading recruitment agency which had contacted 1500 contractors and found that 45% cited end clients had not used reasonable care in status determinations and 18% had blanket banned engaging PSC’s.
IPSE’s survey of freelancers/contractors in the banking sector also found that 39% of end clients were not planning to assess individually but will take a blanket approach or stop engaging PSC’s.
Once again, the CEST tool came in for criticism for the failure to include MoO (Mutuality of Obligation) and the fact that the status determination tool returned a result of ‘unknown’ in 15% of cases.
Why are businesses finding the rules so complex, isn’t this just avoidance – didn’t they know what they were doing before?
An excellent point was made countering the misunderstanding that PSC’s are engaging in this way to avoid tax. The point was raised that PSC’s are paying Corporation Tax, VAT and personal tax on dividends paid. The results of a survey by The Department of Business in 2016 as part of a research project “Understanding Self Employment” found less than 1% chose tax benefits as the reason they freelance or contract.
Rather the issue is the employers NI is not being paid by the end hirers and this is not avoidance, they engage contractors and freelancers on tap or a short-term basis for specific skills/labour needs it isn’t something they have to pay.
Unless MoO is addressed by the Chancellor in his tweaks and improvements do you think CEST remains fundamentally flawed?
There was an agreement that the lack of MoO in CEST is a fatal flaw, and whilst HMRC take a view that MoO is always present, there is a library of IR35 caselaw that suggests the courts disagree. CEST doesn’t test for it, it can never be accurate.
Does the new approach/new rules mean that there will be less compliance initially?
It was reconfirmed that these aren’t new rules just a reform to existing rules essentially shifting the liability if the determination is incorrect from the Personal Service Company to the end hirer/agency. IR35 is not a well understood area of tax law and that is because a lot of the decisions are based on case law, so certainty evolves as the case law does over time.
What is the cost to business, is HMRCs £14.4mill correct?
This question also arose in the first hearing and whilst it is difficult to quantify the cost, the consensus was that this is a significant underestimate. A CBI survey found costs are in the range £100K-£700K for large businesses with a significant proportion at the higher end of that rage. With over 60,000 engagers impacted by the reforms and 20,000 recruitment agencies it was offered that HMRC’s estimate may be unrealistic.
HMRC have said that changes have been extremely successful in the Public Sector, can you give us your view on the implementation and operation of the off-payroll rules.
It was offered that HMRC potentially had only one view of success, i.e. what the total tax taken has been. On the ground people were not able to get individual assessments with reasonable care applied. Instead blanket determinations had been imposed.
HMRC’s view that they have ‘increased compliance’ in the public sector with the introduction of the 2017 reforms was contested to mean in reality they had simply increased on payroll working which did not equal increased compliance.
It was felt that the off payroll changes had delivered detrimental impacts on the health sector with shortages of nurses and doctors who were now either working less or had moved outside of the UK and this remains a concern.
What is your view on the planned reforms?
The collective view was that this reform had the potential to create conflict and confusion at a time when the UK needs to demonstrate advantages globally to remain as competitive and attractive to talent and for investment.
What should the Chancellor do?
There was strong support for either delay or abandonment altogether and a complete re-think. Businesses need simplicity and certainty and the government should look to considerate simpler alternatives.
There was a call for HMRC to do more urgently to mitigate the real risks faced of tax avoidance schemes that are targeting UK individuals currently with contractors being sucked into schemes no different to the loan charge fiasco.
It was agreed in summary that given the Governments position is to simplify the tax system the evidence suggests this is perhaps a challenge.
The outcome of this inquiry is expected to be a report to the Government to which it is expected to reply.