Press release: Risk of unfairness in proposed extension of ‘off-payroll' working rules to private sector
The Association of Taxation Technicians (ATT) is calling for the proposed extension of ‘off-payroll' working rules to the private sector to be dropped or, failing that, deferred. The new rules have proved controversial in the public sector, and the ATT is concerned that self-employed people working through their own personal service companies (PSCs) may unfairly lose a significant part of their take-home pay under the plans.
The ATT makes its call in a response to an HMRC consultation, ‘Off-payroll working in the private sector’.1 HMRC are proposing a shift of the responsibility for determining the relevant tax treatment from the PSC to the end client.
PSCs are typically one-person companies which supply an individual's services to a client. Under the current rules,2 when a PSC working for a private sector client is paid for the services of the worker it has supplied, the PSC has the responsibility for determining if the ‘off-payroll working’ rules apply. Where the rules apply, the income from that worker’s services is subjected to broadly the same amount of tax as if the worker had been directly employed by the end client. If the rules do not apply, then the income is subject to corporation tax and can generally be extracted from the PSC by the worker from their PSC in a more tax effective manner.
Michael Steed, Co-Chair of ATT’s Technical Steering Group, said:
“We do not feel that a convincing case has been made for the extension of these rules to the private sector. Our strong preference is for there to be greater and more visible compliance activity by HMRC to enforce the existing rules.
“We have not had a full compliance cycle since the public sector reforms were introduced, so cannot say for sure that they have worked as well as HMRC think in that sector.
“If HMRC consider that resource constraints mean that these rules have to be extended, we would strongly urge that nothing is brought in before 2020. Businesses will have enough upheaval to deal with in 2019 with the combined effects of Brexit and the rollout of Making Tax Digital. Small businesses in particular will need time to familiarise themselves with the rules and to get the right systems in place. HMRC’s research report acknowledges that the public sector reform was rushed and we worry that doing the same in the private sector would cause pain for businesses, contractors and indeed HMRC.
“HMRC are consulting separately and more widely on employment status following the Taylor Review of Modern Working Practices, and we do not think the two should be looked at in isolation. The Government should instead consider the wider picture such as the taxation of employment verses self-employment before any extension of the off-payroll rules into the private sector goes ahead.”
In its submission, the ATT warns HMRC that in a world of long and complex supply chains, with multiple agencies introducing a great distance between the PSC at one end and the client at the other, there is a risk that the client will simply adopt the approach with the least risk of challenge by HMRC, to the detriment of the PSC and, ultimately, the individual doing the work.
ATT’s concern is that clients will decide that the off-payroll rules apply in a greater number of situations than they truly do and that, unless the PSC has a very strong bargaining position, they will not be in a position to challenge such decisions. Where the individual and their PSC disagrees with a client’s decision as to their classification, there is no right of appeal at that time to HMRC because the tax authority’s view is that this is a dispute between the client and worker which must be resolved between them.
Michael Steed said:
“It is vital that the right decision on tax is taken in the first place given the difficulties that PSCs have in challenging their position. It is expected that many private sector businesses will rely on HMRC’s Check Employment Status for Tax (CEST) tool to determine the position. We have a number of concerns about the quality of the answers that CEST provides and call for measures to ensure that the CEST is developed into something that is reliable and accurate and in which both worker and client can have confidence.”3
Notes for editors
- The ATT’s submission to HMRC’s 'Off-payroll working in the private sector' consultation can be found here.
- In 2000, the Government introduced the off-payroll working rules, also known as IR35. These rules ensure that people working through a personal service company (PSC) who would have been employees if they had been engaged directly, pay broadly the same income tax and National Insurance contributions (NICs) as if they were employed. In April 2017, the Government reformed these rules for engagements in the public sector by transferring the decision over whether the rules apply from the PSC to the end-client. HMRC claim indications are that this has resulted in an increase in public sector compliance. In the Autumn Budget 2017, the Government announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector.
- There have been a number of concerns raised about the operation of the Check Employment Status for Tax (CEST) tool in practice and the ATT called in their response for CEST to be updated and reviewed regularly to ensure that it reflects the latest case law. HMRC’s own consultation document indicates that CEST gives a clear answer 85 per cent of the time. That leaves 15 per cent of users without a clear answer on their employment status. The ATT also called for the introduction of a ruling mechanism for engagers unable to determine the position via CEST.