The consultation document on reforming the off-payroll rules within the private sector closed on 10th August and the Chartered Institute of Taxation (CIOT) have recently published its response. As an impartial educational charity, whose main objectives are to work for a better and more efficient tax system, it’s certainly interesting to hear what their thoughts are, and it seems that like many others, the CIOT are not convinced that reforming the off-payroll rules in the private sector to align with the off-payroll rules in the public sector (introduced from April 2017), is the right course of action.
The CIOT does acknowledge that something should be done concerning non-compliance with IR35, given HMRC’s estimations of the cost of non-compliance increasing to £1.2 billion by 2022/23, but questions whether the public sector rules should be rolled out into the private sector.
They make the valid point that despite HMRC’s estimations that 58,000 more individuals are paying income tax and NICs (and that £410million of income tax and NIC has been remitted from such engagement), the extra income may be borne out of fee-payers acting cautiously, rather than out of a genuine belief that such personnel are caught by IR35.
Additionally, the CIOT refer to recent tribunal cases, such as MDCM and Jensal Software, both of which were found in favour of the taxpayer, despite HMRC’s arguments to the contrary;
“Indeed numbers of cases have gone in favour of the taxpayer over the years which suggests that HMRC’s approach, both in specific cases and as embedded in the Employment Status Indicator (ESI) tool and its successor the Check Employment Status for Tax (CEST) tool, is not necessarily the last word.”
The CIOT go on to say that where CEST is used, together with overly cautious fee-payers who are conscious of the financial ramifications of them making incorrect decisions (and who are deducting tax at source from its PSC workers), this could lead to widespread appeals being made. As they have highlighted above, HMRC’s opinion does not necessarily reflect the final position which could lead to a significant increase in the number of Tribunal cases.
Of the success of the reform of IR35 within the public sector so far, despite HMRC’s estimations the CIOT say it is too early to say whether reform has been successful:
“At the moment we do not quite know how that reform has worked because the change came into effect from 06 April 2017 and the SA returns for 2017/18 have, mostly yet to be filed (the filing deadline being 31 January 2019).”
In other words, perhaps HMRC should wait a while before implementing further reform as they could find themselves occupied with a multitude of appeals to contend with!
Rather than roll out public sector IR35 reform into the private sector, the CIOT instead suggests that additional record-keeping could be the way forward. They suggest that a similar reporting requirement could be adopted as we currently have for agencies, where a business will be required to report on payments made to any PSCs it engages regularly, and that this should be accompanied by a CEST tool report, all of which would be reported via RTI. Additionally, it is suggested that the SA tax return question could be elaborated upon, and where a worker is not operating IR35 but is working through their own PSC, more information would be required of the PSC to support their status. This would be reinforced by an increased penalty regime for which the worker themselves would be jointly liable (with the business engaging them) for any PAYE/NIC debt if the status is found to be incorrect.
Some suggestions for improving the compliance process include weeding out those PSCs to whom IR35 is less likely to apply, such as PSCs who have employees. Additionally, the CIOT suggest that perhaps a process could be adopted whereby a PSC would automatically be caught by IR35 unless the PSC can prove otherwise, and ‘elevated’ penalties could be imposed by HMRC where a PSC isn’t able to provide sufficient evidence.
The CIOT seem to not be in favour of a PSC being taxed at source, but instead to be paid as a genuine business, providing it can prove that it is one. This would certainly seem to be a much fairer approach, but of course there would still be room for opinions to be challenged if this method were to be adopted, and the necessary record-keeping could prove problematic and time consuming for many businesses.
Another key point made by the CIOT is how complex the rules concerning one’s employment status are, which have become even more complex since the introduction of IR35 reform in the public sector:
“This is all surely way too complicated for the average worker who then invariably needs the assistance of a professional tax adviser, something accentuated by the April 2017 changes in the public sector.”
A comment I think everyone would agree with!
One only hopes that HMRC gives all responses the necessary attention they deserve, rather than the consultation process merely serving to be a case of dotting the I’s and crossing the T’s. It may be impossible to come up with a perfect solution, but the CIOT make some extremely good suggestions which, although may not be the perfect solution, could be much more workable than the alternative.