5 reasons the IR35 public sector consultation is one small step for HMRC

5 reasons the IR35 public sector consultation is one small step for HMRC

(One giant leap for everyone else)

 

A play on a famous quote from the Apollo 11 mission (to land on the moon) is where the similarity with HMRC’s mission (to reform the intermediaries’ legislation) ends. Neil Armstrong’s 1969 moon landing was welcomed by all. Unfortunately, the same can’t be said for HMRC’s 2016 IR35 proposals.

 

From 26 May through 18 August – roughly 85 days – HMRC will be consulting with the great and the good about the proposed public sector changes to IR35, which take effect in April 2017. Draft legislation, which will only apply to public sector bodies, will probably follow suit in the autumn. The reforms aim to transfer the burden of determining IR35 applicability from the personal service company (PSC) to the public sector body, agency or third party paying the PSC.

 

Here are five reasons why this doesn’t strike us as a good idea at Intouch.

 

1. HMRC’s IR35 non-compliance statistics are unproven

HMRC claims that a whopping 90 per cent of PSCs (20,000) don’t play by IR35 rules (they incorrectly tax themselves as being outside rather than inside IR35). HMRC estimates that non-compliance will cost the Treasury circa £400m through 2016/17.

 

But Julia Kermode, CEO of the Freelancer and Contractor Services Association (FCSA), begs to differ. She observes that, “there does not appear to be any substantiated data to support HMRC’s 10 per cent compliance claim.

 

Incidentally, the Public Accounts Committee published a report stating that, in 2013/14, PSCs complied with IR35 almost 90 per cent of the time – a wholesale reversal of HMRC’s figures.

 

In light of these statistics, Kermode believes that, “it is inappropriate to persevere with a consultation which appears to have no supporting evidence and where the rationale seems fundamentally incorrect.

 

2. IR35 proposals are unfair, irrational and illegal

Under the IR35 proposals, recruitment firms will be responsible for ascertaining the IR35 status of a worker supplied to the public sector.

 

Bizarrely, they will be held liable despite not having sight of the daily operations of the PSC or its worker (and being unable to confirm the accuracy of the information provided by the worker or the client).

 

According to the Association of Professional Staffing Companies (APSCo), the proposals are “unworkable” because they fly in the face of Article 1, Protocol 1 of the European Convention on Human Rights, which provides that tax systems must be “proportionate, reasonable, public and predictable.”

 

On this note, Samantha Hurley, Operations Director at APSCo, argues that tax law principles dictate that it’s “not reasonable to give parties obligations when they have no means of obtaining the information to fulfil them.”

 

Hurley continues her reasoning (which has been echoed by the Institute of Chartered Accountants in England and Wales): “This is clearly unjust as [recruitment firms] could end up bearing penalties attributable to other people’s lack of disclosure and conduct over which they have no control. The typical recruiter will have to assume that the contractor is inside IR35. This will result in large numbers of contractors in ‘false employment.’”

 

3. HMRC’s IR35 status tool will be inaccurate (and potentially biased)

HMRC has grand plans to devise an ‘all-knowing’ online tool, which the client will use to input information about the assignment to conclusively determine IR35 status.

 

Referring to the online tool, Dave Chaplin, founder and CEO of ContractorCalculator, has this to say: “The finest legal minds in the last 17 years haven’t been able to boil down decades of employment case law into an IR35 questionnaire that provides a binary result. How HMRC is going to achieve this in time for April 2017 is anybody’s guess.”

 

Will the tool be comprehensive enough to cater for all roles, sectors and levels of seniority (à la the current IR35)? Will HMRC be prepared to hang its hat on the tool’s results? Will Joe Public have confidence in them? In reality, the tool will need to have the wisdom of Solomon, the patience of a saint and the trust of all – an unlikely combination!

 

Current thinking in the consultation proposals is that the tool will reach a conclusion in every case: Yes or NO. Intouch is firmly of the opinion that “I don’t know” will be a popular outcome and needs to be catered for.

 

Then, there’s the intractable issue of bias. More often than not, HMRC has lost many a hard-fought legal battle centred on what constitutes an ‘inside IR35’ assignment. It would hardly be a stretch of the imagination if HMRC’s tool toes its own line.

 

Chaplin makes this very point: “The likelihood is that those who are hovering anywhere between certain pass and fail will automatically be deemed within IR35.”

 

4. Contractors’ incomes will fall or contractors will face discrimination

The upshot of the online tool, coupled with HMRC’s inherent bias, is that contractors are likely to be incorrectly put on the payroll and taxed at a higher rate than they should be. According to Deloittecontractors’ average take home pay will drop by 13 per cent if the IR35 proposals go through.

 

Worse still, recruiters may even discriminate against contractors and seek alternatives to meet their staffing needs.

 

5. Contractors will be taxed as employees, but won’t be given employees’ rights

If contractors are taxed like employees, it isn’t unreasonable for them to expect employment rights.

 

FCSA CEO, Julia Kermode, describes the proposals as “unfair, unethical and fundamentally wrong.” Kermode’s is not a lone voice in the wilderness. Chris Bryce, CEO of the Association of Independent Professionals and the Self-Employed (IPSE), says the proposals are “exploitative.”

 

Public sector first, private sector next?

In our view, the IR35 public consultation is part of a much larger HMRC strategy to encourage ‘upstream compliance,’ where taxpayers are educated to get their tax payments right the first time around, which ultimately saves time, resources and increases the ‘tax-take.’

 

As things currently stand, the IR35 proposals are confined to the public sector. But there are growing concerns that, if the proposals are successfully implemented in the public sector, it won’t be long before the Government will venture into the private sector with the same idea (despite “general resistance” by the private and public sectors).

 

So, if there’s ever a time to challenge these IR35 proposals, the time is now. After all, if the system ain’t broke, don’t try to fix it!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

IR35 consultation hot off the press

IR35 consultation

HMRC has now published the anticipated consultation on IR35 and the public sector, following closely on the heels of the announcement made in this year’s Budget and the discussion document in 2015.

 

The consultation centres on a new online test that HMRC expects engagers to use to determine a worker’s status and therefore the tax they will suffer at source. The reliability and acceptance of that test is critical to the fair application of the new rules. HMRC are inviting interested parties to offer to assist in the development of this test. Intouch has already registered its willingness to contribute to the development of a test that is appropriate, fair and consistent with the legislation and case law, and not just HMRC’s view of the world.

 

We will be submitting a response in defence of the genuine self-employed contractors and we urge everyone who has a vested interest to respond to the consultation. It is our chance to influence HMRC’s understanding of our market and attempt to contribute to the shape of the future of tax, not only for public sector contractors, but the wider freelance and contracting market.

 

The consultation can be found here and it invites all to respond, so let’s have our voices heard.

We’ve unpicked the consultation to see just how fair it is…and whether it really is a consultation. Read our findings in our blog posted on Contractor UK.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Industry holds its breath as IR35 discussion phase comes to an end

Industry holds its breath as IR35 discussion phase comes to an end

A couple of weeks ago, I summarised the research, industry discussions and viewpoints that went into the Intouch response to HMRC’s Employment Intermediaries and Tax Relief for Travel and Subsistence (T&S) consultation document.

 

The other hot topic on contractor’s lips has been the suggested reforms to Intermediaries Legislation (IR35), proposed in HMRC’s discussion document. Although at different stages, it is important to be aware of both documents as the changes to T&S will impact assessment of IR35 going forward. If you haven’t already, it’s worth reading my previous post to help set the scene.

 

Unlike the Travel and Subsistence consultation document – which is further down the line and gives us a steer of the likely direction things will go – the IR35 discussion document is very much ‘work in progress’. That puts us in a strong position as there is still a fight to be won.

 

At Intouch, our focus since the proposed changes were announced in July 2015 has been to gather industry opinion, contribute to the debate and advise our clients on establishing their IR35 position.

 

This summer might well come to be known as The Summer of Discontent for contractors, for the overwhelming viewpoints expressed during the discussion phase were of criticism and concern for the future.

 

This is why our response to the discussion document is so crucial. It is a chance for the views and ideas of contractors and all those involved in the temporary contract industry to be heard by the decision-makers currently deciding which changes to take forward. It also provides a platform to put forward suggestions for alternative recommendations.

 

We fully support measures intended to promote compliance and level the playing field and understand the challenges facing HMRC. As we emphasised in our response, the majority of PSC workers wish to be compliant, and indeed are, and pay the right amount of tax on time.

 

However, having reviewed the proposed reforms at length, our primary concern is that HMRC has not truly grasped the complexity and variable nature of the temporary contract landscape.

 

As I warned in a previous article, ‘Unlimited Shades of Grey as HMRC closes in on IR35 abusers,’ any over simplified change to the way PSCs are taxed could have the unintended consequence of wrongly applying employment tax to the genuinely self-employed PSC worker.

 

Whilst we have always agreed that the ‘bad eggs’ who deliberately ignore or manipulate IR35 legislation to take unfair advantage of the system should be flushed out, the current HMRC proposals fail to protect the vital role played by PSCs in boosting UK plc.

 

We are not alone in voicing these concerns. In a recent article, ‘Is HMRC listening?’, FSCA CEO Julia Kermode, says the proposed approach by HMRC to specifically target employment intermediaries on claiming tax relief is, “disproportionate, based on false understanding of the sector and will have a significant impact of the flexible workforce in the UK.”

 

As outlined in contractor news sites such as Contractor Weekly, the fear is that contractor rates will start to rise  to cover the differential in tax paid.

 

So what’s the answer? Our response document concludes with a set of guiding principles and recommendations we believe will make IR35 more effective in protecting the Exchequer. A summary review of the Intouch response to both the IR35 discussion and Travel and Subsistence consultation documents can be found in our IR35 and T&S: Proposed changes ebrief.

 

Last month, The Chartered Institute of Taxation (CIOT) put forward a new approach to tackling IR35 abusers, which rejects the ‘Supervision, Direction or Control’ test. CIOT believe this is unlikely to improve compliance and suggests a better alternative could be to introduce an annual reporting obligation on organisations that engage contractors. This would involve the PSC making an initial assessment as to whether or not it considers that IR35 applies and the engager then reporting to HMRC whether or not it agrees.

 

Now the deadline for responding has passed and the industry can do no more but wait to see whether our voices were heard. I expect the IR35 consultation document that follows next will have scant regard to the input from industry experts and fail to explore or even contemplate being distracted from the ultimate goal of increasing the “tax take”.

 

It may try and align the tests for determining employment status with those for claiming travel expenses which, in my opinion, would be a huge mistake. HMRC are trying to solve a difficult problem with a simple solution but if a simple solution were the best solution it would have been obvious years ago.

 

So as the industry holds its breath, it is important to stay calm and try not to panic about the future for PSCs. Although it is of course a consideration, there is more to life than tax relief and most contractors don’t work through a Limited Company for this reason alone.

 

Working through a Limited Company opens up a host of other benefits such as freedom and control over working conditions, flexibility around family life and of course the possibility of securing a higher day rate. A more detailed overview of the benefits to be enjoyed from setting up a Limited Company can be found in our popular guide Limited Company or Umbrella – which is the right choice for you?

 

If you are unsure where you stand in the debate, or would like to know more about how the proposed may affect you, our expert contractor accountants can help you. Speak to us today on 01202 375 562 or email enquiries@intouchaccounting.com.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

The time has come for HMRC to pay attention and change tack

The time has come for HMRC to pay attention and change tack

If you work in or with the contracting industry, you won’t have been able to miss the concern and speculation surrounding HMRC’s proposed reforms to the way contractors and freelancers are taxed.

 

In the months that followed the Chancellor’s announcement that this was to be reviewed in an attempt to ‘level the playing field’ and flush out abuse, the contractor industry has been shouting its concerns from the rooftops.

 

At the heart of the matter are two key documents; HMRC’s Intermediaries Legislation (IR35) discussion document and the hotly debated Employment Intermediaries and Tax Relief for Travel and Subsistence consultation document.

 

Last month, the CEO of FSCA, Julia Kermode, wrote a blog post ‘Is HMRC listening?’ in which she strongly set out the flaws in HMRC’s calculations. And she raised a good question, as after reviewing the consultation document it would be easy to worry that the views of genuine and compliant flexible workers expressed during the discussion phase did not get through.

 

Now the closing date for responding to both documents has passed, HMRC is no doubt head down in a pile of paperwork in which the contractor industry has tried again to get its fears and suggestions heard.

 

The most advanced of these proposals is the consultation document regarding Employment Intermediaries and Tax Relief for Travel and Subsistence. In it, HMRC sets out its proposal to remove home-to-work travel and subsistence (T&S) tax relief where a worker is employed through an employment intermediary and under the supervision, direction or control (SDC) of any person.

 

Once proposals such as these reach consultation stage, they are usually a pretty reliable indicator of which direction the reforms will go. Which is why our official response to the document makes no bones about the fact we don’t believe it will deliver on HMRC’s intended aims without unintended and costly consequences.

 

Having spent a great deal of time speaking to our personal service company (PSC) clients, contributing to industry commentary and working closely with membership and trade bodies such as IPSE and FSCA, we strongly believe that the proposals are disproportionate, over simplified, and will negatively impact the UK’s highly valuable, flexible labour supply market. The end result is likely to add an excessive burden on smaller and medium size businesses.

 

The Intouch response is clear; the majority of UK contractors wish to be compliant and already ensure they are paying the right amount of tax at the right time. Our fear is that, as the proposal stands, even the most compliant of PSC contractors will end up losing out in one form or another.

 

We, along with so many others, have real concerns over the proposed options for the ‘transfer of liability’. This is an ill-thought out plan to put the burden of determining tax status onto the engager and is likely to have a number of negative consequences. Not least of these could be the application of risk averse measures by UK plc, resulting in a restricted labour market and causing wider economic consequences.

 

Another contentious reform is making personal service and the exercise (or right to) SDC the only criteria HMRC will consider when ensuring the appropriate application for the new T&S rules. Under the current application of IR35, a broader range of factors are considered when deciding a contractor’s tax status. I talked about this on the Intouch blog earlier in the summer and will be writing more about our response to the IR35 discussion document next week.

 

Recruitment website FirstPerson has already warned the proposals could put pressure on rates if workers who fail the SDC test suffer a fall in income.

 

The crumbling icing on the cake is the suggestion that engagers should, in effect, determine availability of tax relief. Our response outlined a number of concerns with this proposal and these can be viewed in more detail in our IR35 and T&S: Proposed changes ebrief.

 

The industry forums are awash with speculation over what will happen should the proposed changes be implemented in April 2016. Some contractors fear clients will automatically consider everyone is under SDC in order to safeguard their position or may even refuse to engage them altogether to avoid the risk

 

Whilst we don’t believe that the reforms outlined in the consultation document have been thought through enough to work, we do agree that something needs to be done to better outlaw false self-employments and the use of abusive models to achieve tax relief where it is not due.

 

It is time for HMRC and the Chancellor to take heed of industry concerns and be brave enough not just to listen, but to go back to the drawing board and change tack.

 

If you are unsure where you stand in the debate, or would like to know more about how the proposed changes to tax relief may affect you, our expert contractor accountants can help you. Speak to us today on 01202 375562  or email enquiries@intouchaccounting.com.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.