IR35 and the Private Sector
HMRC has launched its long-awaited consultation into ‘Off-Payroll’ working in the private sector.
The consultation focuses on the:
- Growth in people working through companies
- Growing cost to the Exchequer
- Impact of the public sector reform (from April 2017)
- Independent research and evaluation (from a HMRC commissioned study)
- Compliance burden of existing IR35 rules on HMRC.
Whilst the consultation document runs to 32 pages and asks 34 questions, it is clear that the main focus of HMRC is to extend the current public sector IR35 rules to the UK as a whole.
The consultation looks for the respondents to make the case for an alternative, but in doing so restricts the scope of such a response and specifically cites four previous options as being out of scope of the consultation, even though some have real merit.
HMRC estimates that a third of people working through their own company should fall within the rules and be taxed as employees, but claims only 10% of this group are currently doing so. It estimates that this has cost the Treasury £700m in 2017/18, but could rise to £1.2bn a year by 2023.
The HMRC commissioned research has concluded that 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 public sector reforms and has resulted in an additional £410m in tax receipts. However, it still expects the net increase to be in line with the previous Budget predictions in Spring 2017 of c.£186m in 2017/18.
In addition the existing study covers the period from April 2017 to August 2017 and so, as HMRC acknowledge, covers the ‘bedding in’ period and may not be reflective. Despite that, HMRC concludes that the public sector reform has been successful on all fronts.
The consultation reports that roughly half of respondents said that they found the reforms easy to comply with, with HMRC’s Check Employment Status for Tax (CEST) tool cited as a key reason, even though it showed in the 750,000 times it was used that self-employed is shown as the outcome in 60% of cases.
What is puzzling is that the consultation shows that in 2000 there were 250,000 small companies with one or two directors and that this had grown to over 1 million in 2015. It seems unlikely that c.75% of these work in the public sector and so the volume of use of the CEST may suggest participants having multiple attempts before getting the ‘right’ answer!
Extending the public sector IR35 rules into the private sector is evidently HMRC’s favoured option, and the case provided makes sense in terms of managing compliance and providing consistency.
However, the public sector experience is difficult to replicate completely in the private sector. The additional administration and ‘learning curve’ experienced in the public sector is potentially more easily absorbed where the engagers are more often than not larger employers.
In the private sector the affected businesses are likely to be engaged by a much more diverse range of employers, with hugely different scale and capacity, a number of whom will find the increased required level of understanding and compliance a real burden.
The scale and diversity of the private sector may also lead to other consequences not as applicable to the public sector. One example might be that arrangements outside of IR35 may have a commercial ‘edge’ over those that aren’t. This may encourage potentially non-compliant behaviours, impact the effectiveness of the new proposals and negatively impact workers.
Whilst we support the consultation and the premise of fairness within the tax system with employees and the self-employed paying the right amount of tax and NIC, we are not encouraged by:
- the reliance on the findings from the limited public sector review, or
- the burden that will be passed to the private sector to manage, monitor and maintain records and audit trails, leading to increased data storage requirements and cost, or
- the restrictions in relation to suggested options or alternatives to the ‘preferred’ route.
We urge employers to participate in the consultation and make their views known, or to feed in to MHA MacIntyre Hudson their views for inclusion in their response. We also encourage employers to review their existing arrangements and use of off-payroll workers to establish those that are:
- Genuinely self-employed
- Definitely caught by IR35
- Potentially less certain and require detailed review.
An early intervention to review, categorise and plan how to manage any potential changes should the HMRC extension of the rules using their preferred option to the private public sector is applied.