About a hundred technical questions about imminent reforms to the IR35 off-payroll working rules are “sitting with HM Revenue & Customs,” a tax expert told the House of Lords Economic Affairs Finance Bill Sub-Committee.
“We have been told that we aren’t going to get answers — instead [the answers] will become apparent from [HMRC] guidance,” Anita Monteith, senior tax policy adviser at the Institute of Chartered Accountants in England and Wales, told the subcommittee on February 10.
The subcommittee’s inquiry into the draft finance bill is focusing on the reforms set to take effect in April. It heard that the legislation itself is not ready, and that it would be unrealistic to expect everyone in the labor supply chain to understand the complex employment status rules that have led to several HMRC decisions being overturned by independent tribunals.
The panel of tax experts was asked how ready businesses are for the reforms. “To be ready, you have to have certainty regarding the rules. [The institute] would say we don’t have the necessary certainty at the moment,” Monteith said. “Everyone in the supply chain needs to be aware of the rules and to be ready, so for the very largest businesses with an HR department and a contracting department, those departments will have a different take on what they need to do and [they] need to have worked closely together. If you’re an international business as well, that gives you an extra problem.”
“At the other end of the supply chain, you have the person doing the work. Personal services companies also need to be ready — not just the ones working for the largest entities — because everybody needs to have an awareness of the rules so that they know whether they might be affected,” Monteith added.
Justine Riccomini, head of employment taxation at the Institute of Chartered Accountants of Scotland, told the subcommittee that larger employers are possibly in a better state of readiness than smaller ones. “There are many unrepresented businesses and taxpayers, and they’re not knowledgeable about taxes generally, let alone something that’s as complicated as this has now become,” she said.
Jason Piper, head of tax and business law at the Association of Chartered Certified Accountants, noted that it was confirmed on February 7 that the new rules apply only to services provided on or after April 6. “To still be finessing the rules and making those changes this close to implementation has to be a concern for business. The largest ones will often now ask for 12 or 24 months’ notice to be able to change their systems and processes. The fine detail isn’t yet certain,” he added.
Blanket Decisions Are ‘Inevitable’
Asked about the likelihood of businesses making blanket status decisions, Riccomini said there had been “a tendency for engagers to make blanket decisions” since public sector organizations were made responsible for status determinations in 2017. “I’m not sure that’s going to change in the private sector. If you have a lot of contractors, it takes about 30 to 90 minutes to conduct a status determination . . . and if you have a couple of hundred [contractors] working for you, you can be there until kingdom come,” she said. “It’s inevitable that some form of blanket decision-making will take place, and we know . . . that lots of contractors left the public sector to work elsewhere, and they’ve had terrible problems with resourcing and recruitment in certain parts of the public sector — for example, in the National Health Service.”
Riccomini suggested that the April 2020 reform should be treated as a sticking plaster solution, designed to remedy the loss of employers’ National Insurance contributions (NICs). “I suggest that we convene a working party — which should probably include the Office of Tax Simplification — to tackle the conundrum of employment status as a whole,” she said.
Loan Arrangements ‘Still Out There’
Meredith McCammond, technical officer at the Low Incomes Tax Reform Group of the Chartered Institute of Taxation, outlined the group’s concerns, including the prospect of private sector workers being drawn into loan arrangements by unscrupulous umbrella companies.
“In supply chains where there are low-paid workers, the margins that [employment] intermediaries make tend to be very low. In order to maximize their profits, they’re going to try to reduce their employment costs. One of the ways they’ve done that until now is to put workers into limited companies, because when you pay a limited company you don’t have to operate Pay As You Earn and there’s no employer NIC charge,” McCammond said. “One of the things we saw with the public sector changes was a movement of workers out of limited companies and into loan arrangements, and we’ve heard specific examples [including] locum nurses. Where an umbrella company pays a worker in the form of a loan, that also doesn’t attract employer NIC.”
It is important to recognize that loan arrangements are “still out there in the marketplace” despite the loan charge, McCammond said. “There should be alarm bells ringing at HMRC. Not all umbrella companies are going to use loan arrangements — they would tend to be quite vicious arrangements. Some umbrella companies are very good and take the welfare of their workers very seriously. Some might try to find a halfway house, whereby they still try to find ways to save money but don’t use such vicious things as loans,” she added.
In a May 2019 submission, the Low Incomes Tax Reform Group noted that “one of the outcomes of the public sector changes was a mass shift of contractors (often unwittingly) into highly aggressive umbrella models, including ones based on loan arrangements.”
“On umbrella companies, there’s a bit of a blind spot within HMRC as to how the temporary labor market works, and all the dark arrangements and engagements that can come out of that,” McCammond told the subcommittee. “We’d be very happy to sit down with HMRC and tell them everything we know about the inner workings of the labor market because we think that would be really useful for their policymakers to take on board when they’re designing new rules and regulations [for] this sector.”
Clients and Intermediaries Face New Risks
A concern that does not seem to have caught policymakers’ attention is the “real-world impact” of passing responsibility for the status test from contractors on to third parties, Piper told Tax Notes on February 11.
The IR35 legislation introduced in 2000 was drafted widely to give HMRC “as much scope as possible to challenge abusive behavior where it existed,” Piper said. “However, the expectation (and reality) was that HMRC only invoked the provisions in identified targeted cases, i.e., the personal service companies that Parliament was worried about.”
Sole traders and partnerships “almost certainly never gave IR35 a moment’s thought,” even though they could potentially be regarded as intermediaries by section 52 or 53 of what is now the Income Tax (Earnings and Pensions) Act 2003, Piper noted.
“That didn’t matter in practice, because the businesses weren’t troubled with ‘proving a negative’ that HMRC weren’t investigating anyway. But under the new regime, the test has moved from small businesses to large, risk-averse corporations, with large, risk-averse legal teams,” Piper said. “Trust or company service providers are potentially affected in particular — much of what they do could be seen to discharge duties of officers of the company client, which potentially brings it into IR35. Client service purchasers will (or should) be aware of this, and therefore [should be] proactively managing that risk in a way they have never had to before.”
Piper suggested that proposed reforms that could increase regulatory activity and potentially see small businesses “cut out of service provision procurement” as part of risk mitigation should be assessed carefully “to ensure that the balance between government priorities is properly addressed.”
Government ‘Not Aware’ of Blanket Determinations
The government’s review of the implementation of the April 2020 reforms has conducted a series of roundtable discussions with stakeholders, Financial Secretary to the Treasury Jesse Norman told members of Parliament during Treasury questions on February 11. “The review will conclude by mid-February, after which recommendations will be made public,” he said.
Labour MP Jessica Morden said there is “already concern that companies are making blanket determinations, forcing genuine contractors into contracts that tax them as employees but with no employment rights.” She asked Norman, ahead of a protest planned by contractors for February 12, to consider pausing the process in order to “do a proper review.”
“We are not aware of blanket determinations being made, although it must be said that many firms are choosing to acknowledge disguised employment and bring those contractors in-house,” Norman said, adding that there are “various routes” by which contractors may challenge status determinations.