IR35 private Sector Reform (Update May 2019)

Our submissions on the off-payroll consultation

David Kirk & Co. have made the following submissions to HMRC in response to the off-payroll consultation:

General comments

We believe that making the client, rather than the contractor, responsible for PAYE matters is in general terms the right way to go. However how it is done matters a lot, and with anything as complicated as this there are likely to be side-effects that may turn out to be quite serious and create injustices and a great deal of extra work, in the latter case for HMRC as well.

Regrettably the proposals made in the consultation appear to us to have many flaws in them that will do exactly that, and we believe that a simpler approach is required, that makes the client liable in all circumstances. We understand that this is not favoured by HMRC because it would mean PAYE being operated on the agency’s margin as well as on what the contractor gets. However there is a simple workaround for this which is widely used where agencies make supplies for VAT purposes to clients that are exempt and so have a very similar issue: the agency’s margin is charged separately (and in this instance would not be liable to PAYE), and PAYE could then be operated on the rest of the payment. We believe that agencies would adopt this, and although matters would be slightly more complicated at the client’s end they would be greatly simplified at the contractor’s end, for HMRC when they investigate, and for all parties where there is a default.

Otherwise we have serious concerns about several matters arising:

    1. There will be two off-payroll regimes in place: one for contractors working for small businesses outside the public sector, and another for everybody else. This will not be properly understood by the former group who will have to operate the same rules that on HMRC’s account they are widely ignoring at the moment: the subliminal message that will go out with the introduction of these new rules is that the old ones will no longer apply. This subliminal message will gather extra force when people perceive (as is likely to be the case) that HMRC do not make any serious attempt to enforce the small company rules. Furthermore, when the message has gone out that it is too much of a burden for a small business client to operate the off-payroll rules, it is hard to justify passing responsibility for doing so on to a smaller one (the contractor’s PSC). Finally, unenforceable laws are unfair both on those who keep them and on those ignorant of them that have the misfortune to be caught.
    2. Those working for small companies will have no mechanism for knowing that they are doing so and therefore have to consider the off-payroll rules. They cannot be expected to look up their clients’ details at Companies House, still less to understand them so as to be able to make the decision, and even if they could there would be no such equivalent for non-corporates or foreign companies.
    3. There must be a proper appeal system for contractors, in which HMRC are involved and in which end-clients do not have the final word.
    4. We believe that this reform will result in more off-payroll business being passed to umbrella companies as a means of circumventing responsibility. Whilst we do not see anything intrinsically wrong with that, there are persistent rumours that there a large number of such companies not operating in a compliant manner in the public sector where these reforms have been introduced already (in that they are offering contractor loans which are largely untaxed, which is now flagrantly illegal), and if so this problem can only be expected to spread substantially once they are introduced into the private sector. This is likely to be controversial and the public, Parliament and other branches of Government should be warned about this so that they can take whatever action they feel to be appropriate.
    5. One other result of the public sector reforms which is virtually certain to be replicated int eh private sector is that clients and agencies quote an ‘umbrella rate’, which is a rate inclusive of employers’ NICs which the worker then ends up paying – or at least perceives that he is doing so. This is the cause of much bitterness and the problem would also be resolved or substantially mitigated by making the client responsible for operating PAYE in all circumstances, as suggested above.
    6. We remain concerned at HMRC’s track record in defending IR35 cases at the Tax Tribunal, where they have lost ten out of twelve cases since the new tribunal system came in in 2010, and have not clearly won the other two. This suggests that their officers do not understand employment status as well as they should, and is likely to lead to further challenges – this time from people who can afford to take HMRC on which PSCs generally cannot. Any reform is likely to fall flat until this is addressed.

In response to the particular questions:

Question 1 – Do you agree with taking a simplified approach for bringing non-corporate entities in to scope of the reform? If so, which of the two simplified options would be preferable? If not, are there alternative tests for non-corporates that the government should consider? Could either of the two simplified approaches bring in to scope entities which should otherwise be excluded from the reform? Is it likely to apply consistently to the full range of entities and structures operating in the private sector? Please explain your answer.

In our view this would not simplify things – having two different regimes never does. This is only likely to be a problem for sole traders as all other forms of non-corporate, partnerships included, are likely to have balance sheets. We suggest that the matter could readily be dealt with by specifying that if a non-corporate does not have a balance sheet, it is deemed to satisfy the qualifying condition on balance sheets.

Question 2 – Would a requirement for clients to provide a status determination directly to off-payroll workers they engage, as well as the party they contract with, give off- payroll workers sufficient certainty over their tax position and their obligations under the off-payroll reform? Please explain your answer.

Up to a point. It would be very beneficial for the status determination to be required to be given to the worker before he signs the contract, so that he can contest it if he feels it appropriate or walk away from the contract if dissatisfied. Beyond that, it is something that he is likely to find out very quickly anyway, as it will affect the way that he is paid.

Question 3 – Would a requirement on parties in the labour supply chain to pass on the client’s determination (and reasons where provided) until it reaches the fee-payer give the fee-payer sufficient certainty over its tax position and its obligations under the off- payroll reform? Please explain your answer.

No – because the client’s determination might be wrong, even when made after due deliberation and in good faith. If the client determines that the contract is outside the rules, and HMRC disagrees, then HMRC’s recourse is against the fee-payer not the client. This is unjust as the fee-payer is unlikely to have the information to be able to make a decision of this kind without extensive assistance from the client. It will also cause HMRC difficulties as they will have to investigate the client as well as the fee-payer, added to which the client is far more likely than the fee-payer to have the requisite money to pay the shortfall. (Fee-payers exist for the purpose of paying out what they get in, and so generally have very little in the way of reserves.)

Question 4 – What circumstances may result in a breakdown in the information being cascaded to the fee-payer? What circumstances might result in a party in the contractual chain making a payment for the off-payroll worker’s services but prevent them from passing on a status determination?

All the normal failures of office communication could cause this: holidays, key people being off sick, responsibility for making determinations resting in different places from responsibility for hiring. There are also likely to be problems proving that information was passed on after the event: looking for an e-mail with this particular nugget on it on a large company’s server a year later may well be problematic. This is also likely to cause HMRC difficulties as they will need to establish which person in the chain is actually responsible.

Question 5 – What circumstances would benefit from a simplified information flow? Are there commercial reasons why a labour supply chain would have more than two entities between the worker’s PSC and the client? Does the contact between the fee- payer and the client present any issues for those or other parties in the labour supply chain? Please explain your answer.

This would require a major cultural change as generally speaking clients engage agencies to fulfil their requirements, and will expect all communications to go through them – anything else would be seen as a confusing may of managing things. Besides, it is well known that supply chains in the oil and gas sector can be much longer: the specific sectoral reasons for this are not known to us but we can see a genuine role for four intermediaries between the client and the PSC, as follows: client > platform > master vendor > agency > fee-payer > PSC. Where a good many off-payroll workers are required it may be difficult for one agency to supply everybody, so a master vendor would come in to communicate with the client and find the agencies who can supply them. The use of platforms is probably more prevalent in the public sector but there is no reason why they should not be engaged in the private sector as well: they are large well-known companies such as Capita plc who would act in respect of all the client’s requirements, set the general rules and engage with the master vendor.

Question 6 – How might the client be able to easily identify the fee-payer? Would that approach impose a significant burden on the client? If so, how might this burden be mitigated? Please explain your answer.

The only way of doing this is to ask the agency. This would impose a burden but probably not a significant one once agencies became used to providing the information.

Question 7 – Are there any potential unintended consequences or impacts of placing a requirement for the worker’s PSC to consider whether Chapter 8, Part 2 ITEPA 2003 should be applied to an engagement where they have not received a determination from a public sector or medium/large-sized client organisation taking such an approach? Please explain your answer.

We see no chance of this happening in practice – see our comments in section (a) and (b) of General Comments above. We believe that if this reform goes through chapter 8 should be repealed.

Question 8 – On average, how many parties are in a typical labour supply chain that you use or are a part of? What role do each of the parties in the chain fulfil? In which sectors do you typically operate? Are there specific types of roles or industries that you would typically require off-payroll workers for? If so, what are they?

We advise people using supply chains, rather than using them ourselves, and so cannot answer this question.

Question 9 – The intention of this approach is to encourage agencies at the top of the supply chain to assure the compliance of other parties, further down the chain, through which they provide labour to clients. Does this approach achieve that result?

We believe that agencies are inherently unsuitable for this task and that therefore no serious compliance work is likely to be done by them. Many are substantially smaller businesses than their clients and they have neither the skills nor the clout in the market to be able to do this. This might change once a major and costly scandal has hit the headlines but even then we would be doubtful – compliance failures are likely to be seen by most of them as an occupational hazard which it is too expensive to do anything meaningful about. We are also concerned that businesses that were once reputable may cease to be, for instance after a takeover. It is not clear from the consultation document whether the transfer of liabilities is intended to be automatic or discretionary; we believe that if used at all it ought to be discretionary as there will inevitably be circumstances when intermediaries may become insolvent through bad fortune, and others that those responsible for ensuring compliance could not eb expected to pick up. We suggest that any transfer of liabilities be handled by a specialist department of HMRC that is experienced in telling malefactors apart from the genuinely unfortunate, such as exists for transfers of NIC liabilities to directors.

Question 10 – Are there any potential unintended consequences or impacts of collecting the tax and NICs liability from the first agency in the chain in this way taking such an approach? Please explain your answer.

We do not think that agencies are likely to make any serious attempts to protect their position here against unexpected liabilities, which as noted above are likely to be rare and to be seen as unfortunate and unavoidable. Furthermore, a major claim of this kind could well be sufficient to render an agency insolvent – their margins are generally not high. Whilst agencies do have this liability under the agency rules, they have generally dealt with it by either operating PAYE themselves, and thus retaining control over the process, or by insisting on paying through umbrella companies who, having contracts of employment, then have all the PAYE responsibilities themselves.

Question 11 – Would liability for any unpaid income tax and NICs due falling to the client (if it could not be recovered from the first agency in the chain), encourage clients to take steps to assure the compliance of other parties in the labour supply chain?

Not to any serious extent: risks of this kind are not usually seen as being capable of management and so it is always easier to do nothing and accept the consequences. It is difficult to see what assurancesonecangetfromotherpartiesinthesupplychainthatarereallyworthmuch. Where clients do take steps, they are likely to be of a kind where they only use large well-known agencies, thus either adding to the numbers in the supply chain and making it less efficient, or making it difficult for new start-ups to enter the agency world and thus being anti-competitive.

Question 12 – Are there any potential unintended consequences or impacts of taking such an approach? Please explain your answer.

See the answers to the two previous questions.

Question 13 – Would a requirement for clients to provide the reasons for their status determination directly to the off-payroll worker and/or the fee-payer on request where those reasons do not form part of their determination impose a significant burden on the client? If so, how might this burden be mitigated? Please explain your answer.

Yes, but a necessary burden. There is an acknowledged grey area when it comes to employment status, and anyone who suffers adverse consequences from getting status determinations wrong needs to take action to justify and protect his position.

In the private sector the requirement to take reasonable care will need specific legislation and a specific remedy for workers where it is not taken; in the public sector this is by contrast a matter of public law.

Question 14 – Is it desirable for a client-led process for resolving status disagreements to be put in place to allow off-payroll workers and fee-payers to challenge status determinations? Please explain your answer.

No. Clients will largely not have the expertise to resolve marginal cases (which ones where workers are dissatisfied are likely to be) and will hide behind CEST, or if CEST does not give an answer, outsource the issue to specialists who may or may not have the appropriate expertise. Workers are not likely to view them as impartial as the clients will all have an attitude to the risks that they are prepared to take and so may be excessively cautious. It is essential that there be recourse to the Tax Tribunal on this, and that HMRC are involved in the process in some way.

There is a further issue in that some employment status considerations are known only to the worker, such as the number of clients and the nature of the work performed, when the worker claims to be in business on his own account. This is accepted by HMRC (see the Employment Status Manual, pages 549 to 553). It is not generally appropriate that these should be shared with the client (either in relation to the worker’s own affairs or that of his clients), and the client would have no means of knowing whether the worker was telling the truth or not without an exhaustive and intrusive inquiry which most clients would be ill-equipped to carry out. We note in particular with reference to this the FTT’s decision in the recent case of Atholl House Productions [2019] UKFTT 0242 (TC), where this was the criterion for the decision made and the judges, in their section on this (paragraphs 105 to 114), made no reference to the contract at all. It is therefore essential, at least in cases where being in business on one’s own account is claimed to be a factor, that the worker should have direct recourse to HMRC to determine the matter.

Question 15 – Would setting up and administering such a process impose significant burdens on clients? Please explain and evidence your answer.

See our answer to the previous question.

Question 16 – Does the requirement on the client to provide the off-payroll worker with the determination, giving the off-payroll worker and fee-payer the right to request the reasons for that determination and to review that determination in light of any representations made by the off-payroll worker or the fee-payer, go far enough to incentivise clients to take reasonable care when making a status determination?

No, because they will hide behind CEST and so will not have any incentive to engage properly in the process.

Question 17 – How likely is an off-payroll worker to make pension contributions through their fee-payer in this way? How likely is a fee-payer to offer an option to make pension contributions in this way? What administrative burdens might fee- payers face which would reduce the likelihood of them making contributions to the off- payroll worker’s pension?

We do not have the requisite experience to be sure but suspect that the answer would be that there would not be much appetite for pension contributions.

Question 18 – Are there any other issues that you believe the government needs to consider when implementing the reform? Please provide details.

See our answers in General Comments above, in particular paragraphs (d) and (e). Also:

  • –  There needs to be a deemed employment marker in HMRC’s systems, so that this legislation does not end up getting used by fee-payers to deduct student loan payments or operate pensions auto-enrolment.
  • –  We recommend that HMRC should make clear what the position is when the OECD Model Tax Treaty is in play. If there is no intermediary, and the client has no tax presence in the UK (unless bearing the cost for a resident party), article 15 specifies that income of someone resident in the foreign state should only be taxed in the UK if that person is in the UK for 183 days or more. In marginal cases – particularly in industries that are project-based, such as construction – the number of days spent in the UK will not be known until close to the year end. If HMRC are expecting a UK-based fee-payer to operate the off-payroll rules irrespective of this, this should be clearly stated.

On May 22, 2019, posted in: Articles by