Three reports published on off-payroll introduction
It seems that the old saying around buses arriving together could definitely be applied to the recent publication of 3 separate reports into the introduction of both the off-payroll working (IR35) changes for the public sector and the more recent off-payroll working changes introduced from April 2021 for those businesses in the private sector.
The first to be published was a report commissioned by HMRC and undertaken by an independent research company with the remit to consider the impact of the off-payroll reform in the public sector.
The standout findings were that the impact of the reforms in the public sector was minimal and that it was considered that there had been no significant change in the number of off-payroll contractors engaged between 2017 and 2020. This outcome is somewhat surprising, considering it was well publicised that there were serious skills shortages following blanket determination policies being adopted by public bodies. This approach led to contractors being found inside the scope of the new rules simply because public bodies were not willing to adopt or invest in an approach to assess contractors working through their own personal service company (PSC) appropriately.
The report noted that the majority of those public sector bodies who took part in the review never outsourced the status determination, with the assessment tool CEST (Check Employment Status for Tax), the online tool provided by HMRC to assist engagers in assessing whether an engagement falls inside or outside of the scope of the off-payroll IR35 rules appearing to be the go-to resource to use when determining a contractor’s status.
Surprisingly, the research carried out does not appear to address the area of errors or non-compliance. It has been well publicised that certain public sector bodies made mistakes in determining status despite following HMRC’s guidance and using CEST.
Furthermore, contractors were not asked to contribute to the research, so it is very difficult to get a true sense of public sector reform where the contractors themselves who have been directly affected by the changes are not questioned over the impact on them.
The next report has been produced by the National Audit Office (NAO) and appears to be a much more balanced assessment of the impact of the implementation.
The key findings of the NAO report are that HMRC gave public bodies too little time to deal with the changes and again, that the CEST tool was simply not reliable enough and that HMRC had failed to help public bodies adapt to the changes and failed to support the use of the CEST tool.
This latter point is borne out, as mentioned above by the (now) well publicised settlements HMRC has reached with Government bodies such as the Ministry of Justice, Department of Work and Pensions, and The Home Office with settlements totalling £millions due to HMRC in respect of off-payroll IR35 failures due largely to the incorrect use of CEST when making the status assessments.
Another important fact to come from the NAO report is the way in which HMRC makes its assessment of any underpaid PAYE and National Insurance Contributions (NIC) seemingly disregarding any tax and NIC previously paid through the PSC and also assessing any tax liability without applying a personal allowance for those workers who have not taken a salary from their company.
This approach seems to have attracted heavy criticism from interested parties, yet HMRC seems reluctant to change this approach.
The re-occurring issue with both these reports is the performance of CEST, and problems highlighted again in the final report published by the Economic Affairs Finance Bill Sub-committee.
This latest report looks at the changes to off-payroll working introduced into the private sector from April 2021 particularly looking at the fair treatment of people affected by the proposed changes.
The report suggests that HMRC must acknowledge the limitations of CEST and that it cannot be considered a substitute for employment law and must also incorporate the concept of mutuality of obligation in its question set to allow users greater confidence in the output.
Further reference is made to HMRC fundamentally underestimating both the impact on a business in implementing the changes and the actual costs to the business of applying the new rules.
One of the outcomes of the new rules seems to be the significant growth in umbrella companies who would appear to be taking advantage of businesses’ unwillingness to engage directly with contractors either inside the new off-payroll IR35 rules with the inherent costs of Employers NIC or for fear of assessing outside of the scope of the off-payroll rules but being found to have erred in the decision process and being liable to PAYE, NIC and penalties.
Whilst not illegal some umbrella companies appear to operate models which fly in the face of the PAYE and NIC legislation thus creating another compliance headache for HMRC to solve and an issue that was identified in the report as an area of potential tax avoidance.
The final takeaway from the report is that contractors found to be inside the scope of the off-payroll IR35 rules and suffering a PAYE and NIC deduction have none of the employment rights enjoyed by directly-employed workers, something the report urges HMRC to address in the quest for fairness.
If you are a business or contractor affected by these changes and wish to discuss potential options for compliant engagement solutions, then please feel free to contact Guild Freelancing whose experts will be able to offer advice on a possible way forward.
The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.