HMRC has launched its long-awaited consultation into ‘Off-Payroll’ working in the private sector , and, in doing so, all but confirms its plans to extend the current public sector IR35 rules to the UK as a whole.
Coincidentally, the launch of the consultation comes just days after it emerged that a contractor had defeated the taxman in an IR35 tribunal during which HMRC itself demonstrated a very loose grasp of the legislation.
At this stage, the consultation appears to be nothing more than a formality. HMRC claims it is welcoming suggestions for alternative solutions, but if history is anything to go by, this is a done deal.
The cost of non-compliance: can we trust HMRC’s figures?
HMRC estimates that a third of contractors operating outside of IR35 should fall within the legislation, but claims only 10% of this group are currently doing so. It believes this shortfall has cost the Treasury £700m in 2017/18 but could rise to £1.2bn a year by 2023.
When contractors earn more money, they actually pay more tax than they would if they were employed. The only shortfall comes from employer’s National Insurance (NI), which is avoided by corporations and overlooked in the consultation. Yet, as always, HMRC’s focus is on ensuring contractors pay more even tax.
Curiously, despite proposing amendments to the legislation, whereby contractor hirers are tasked with assessing IR35, the taxman acknowledges that limited company contractors – who are typically better versed on IR35 – may not have the right skills or systems in place to carry out an accurate IR35 assessment.
Will HMRC consider Taylor Review recommendations?
The consultation attempts to evaluate the effectiveness of the public sector reforms while exploring how to tackle non-compliance in the private sector. Critically, HMRC acknowledges that the latter includes seeking views on a possible extension of the public sector rules into the private sector, a solution which the taxman later describes as the ‘lead option’.
Disappointingly, HMRC will not consider any change to the ongoing consultation into the possible alignment of employment status definitions across tax and employment rights, as recommended in the Taylor review
The only way that a remotely fair tax system can be achieved is by aligning tax and employment status. Yet, predictably, HMRC has omitted this from consideration right from the offset.
As we have seen in the public sector, these proposed reforms will further enable firms to force workers into false self-employment, circumventing their obligation to give them employment rights. This is wholly unacceptable.
Rising tax receipts means rising compliance for HMRC
According to HMRC, roughly 58,000 more public sector workers than expected paid tax via Pay As You Earn (PAYE) between April 2017 and February 2018, following the reforms. This claw back, it claims, has contributed to an additional £410m in tax receipts. However, these figures don’t necessarily equate to rising compliance:
HMRC can pat itself on the back for increasing its tax revenue, but much of it is at the expense of contingent workers being forced into false employment. Unlawful blanket assessments carried out by hirers have ensured that thousands of public sector contractors are being incorrectly taxed. Moreover, the figure doesn’t account for spiralling costs that Government is paying to keep contractors on key infrastructure projects..
Nonetheless, HMRC concludes that the reform has been successful on all fronts, dismissing factual evidence presented to demonstrate the damage that the reforms have caused as merely ‘anecdotal’.
Private sector rollout looks a foregone conclusion
Extending the public sector rules into the private sector is evidently HMRC’s favoured option, and few alternatives are offered. However, the taxman’s recent track record, when it comes to assessing IR35, has given rise to serious concerns about a private sector rollout:
How can HMRC be expected to educate millions of businesses to assess IR35 when it doesn’t understand the legislation itself. All that will be seen in the private sector is further non-compliance.
The taxman poses further amendments to the legislation to improve its effectiveness and ease of adoption. One is to ask hirers to gather and retain information for off-payroll engagements, while another is to require hiring clients to conduct checks of their labour supply chains to ensure that they are compliant with IR35.