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Markel Tax

10 Aug 2018

Response to the off payroll working in the private sector consultation

Following on from our previous update we have compiled our response to the IR35 consultation (Off payroll working in the private sector, closing date 10 August 2018).

We provided our responses based on our experience of dealing with contractors, agencies and end client organisations and looking at what has already taken place in the public sector.

The responses to the questions below go through the three main areas of the consultation:
  1. Roll-out of the public sector legislation in the private sector (Qs 1-14)
  2. An alternative of requiring end clients to review and police their labour supply chain (Qs 15-24)
  3. An alternative of requiring the end client to retain all key documentation (Qs 25-31)

The opinions, provided by David Harmer, Tax Consultancy Manager at Markel Tax, represent our views and the views of our clients and in typical fashion we have not shied away from saying exactly what we mean (and what our clients want to be said on their behalf).

As can be seen by the answers, we do not believe the public sector legislation adequately addresses IR35 and it should not be rolled out into the private sector without revision and additional guidance (and the alternative options do little in providing a more palatable option).

We firmly believe the consultation cannot be undertaken in isolation of the self-employed status consultation (which we have previously provided commentary on). Any changes to the law on self-employed status will change how IR35 is to be decided. To consult on changes to the administration of IR35 before we know how IR35 is to be decided seems a little premature (and if both changes happen in the same tax year this could be catastrophic to the industry).

We are working closely with contractors, agencies and clients already, reviewing contracts and helping to shore up the contractual position prior to next year; and with the help of Markel Tax we are working on an insurance offering to provide all parties with peace of mind once the legislation comes in.  For other companies and accountants we have been able to help them set up an umbrella company to guarantee their competitiveness and income in the new world.  Once we have the finer details of the legislation, after the Budget in November, we will of course be holding seminars to go through all the nitty gritty of the legislation.  

If, having read through our response, you would like any more information or have any queries please contact David Harmer or Paul Mason or call 0345 066 0035.

Q1. What could be done to improve the compliance enquiry process to reduce noncompliance, whilst safeguarding the rights of customers?
Focused policing of the legislation; however this would require a three pronged approach by addressing internal and external issues:
  • Better training for HMRC personnel who will undertake the enquiries.
  • Quicker response times from HMRC personnel who are dealing with the enquiries (the current delays could be due to a staffing shortage which would need to be addressed.
  • Improved guidance that accords with case law precedent (for example current HMRC guidance and the CEST tool ignores what Mutuality of Obligations is as defined by the Courts).
Admittedly this would not offer a quick fix or a cheap fix but it would provide the most effective long term solution to the current perceived non-compliance.

Q2. Could the public sector regime better fit the needs of businesses? How?
The public sector regime did not run smoothly for the public sector and it still causes issues.There were, and remain, fundamental gaps in the guidance provided by HMRC and the legislation itself (for example there is still no comprehensive guidance on basic accounting functions for a “caught” PSC; there is no sufficient guidance on what “reasonable care” means in respect of the decision made by the public sector body, and the legislation itself provides no appeal mechanism for a PSC against a decision made by the public sector body).
To place the same legislation onto the private sector without addressing these (and other) issues would be reckless.
In addition the private sector has monetary constraints and pressures which are vastly different to public sector bodies. The responsibility for deciding whether or not IR35 applies will now be placed with every end client organisation (regardless of their size, structure or resources) the majority of the private sector do not have the resources that public sector bodies have.

Q3. What, if any, changes could help make the administration as simple as possible?
As touched on above, clearer guidance on the decision making process.
  • What measures constitute reasonable care. 
  • An updated CEST which accords with case law. 
  • Guidance to contractors and their accountants on accounting principles. 
  • Legislation which allows an appeal mechanism against end client decisions.

Q4. If the private sector rules were changed, do you have any evidence that there are parts of the private sector where the administration of any regime may need to vary even though the basic principles including for determining status remain the same?
In addition to the above issues which need to be addressed, there is currently consultation which seeks to codify or redefine a contract of service. The definition of what constitutes a contract of service is the founding consideration for IR35. This decision will be put in the hands of the end client under this legislation.
The real change in administration for the private sector is this; changes to the administration process of IR35 should not come into force alongside legislative changes to the decision making process of IR35.
If the rules for deciding whether an engagement is within the provision of IR35 are to change in April 2019 then companies, accountants and tax advisers should be given the opportunity to understand these new rules before a change in the administration of IR35 is introduced.

Q5. Is there any evidence that parts of the private sector will not have, or be able to acquire the administrative capacity, knowledge and resources to enable them to implement any changes in relation to off-payroll workers?
The “private sector” is a convenient label to describe every non-public sector company that utilises contractors. There is no set “standard private sector company”, it encompasses large multi-national entities and small owner managed businesses. One cannot compare companies at each end of the spectrum and expect them to have equal and adequate resources for implementing changes of this fashion.
Small to medium enterprises who rely on subcontracting services to PSCs are unlikely to have the in-house expertise and will have to rely on external specialist consultancies (and quite simply they do not have as deep pockets as the companies on the larger end of the spectrum). If those at the smaller end of the spectrum are expected to compete on equal footing with larger business it will stifle their ability to grow their business and remain profitable (it could see the tax collected by the administration of these changes does not outweigh the tax lost in CT).

Q6. How could these difficulties be mitigated?
Aside from not implementing the changes at all, introducing a system whereby these changes will only apply to larger business (perhaps those with over £3m turnover, or based on the number of contractors they engage).

Q7. What aspects of policy design might be adjusted if similar changes were brought in for the private sector? Should we bring in a specific penalty if agencies fail to comply?
From our dealings with PSCs, agencies and end clients we have not heard of any agencies which have not adhered to the decision made by the end client. The public sector legislation has not been in place long enough for anyone to make an informed decision as to whether addition penalties are necessary. In our experience the current legislative framework deals adequately with agency compliance.

Q8. What action should be taken in the case where the fee-payer hasn’t acted upon the client’s conclusion that the worker would have been regarded as an employee for income tax and NICs purposes if engaged directly? Should an obligation be placed upon the fee-payer to adopt the client’s conclusion and there be sanctions for failing to do so?
We have not seen any evidence in the public sector of any agencies opting not to adopt the client’s decision. The need for contractors is driven by the end client, not the agency. There is no benefit to the agency in not adopting the end client’s decision.

Q9. What action should be taken if the worker or PSC is knowingly receiving income that has not had the right amount of tax and NICs deducted?
I fail to understand a scenario where this could happen. In the first instance knowingly would pre-suppose the PSC had far greater knowledge of IR35 than the agency or end client (and/or their advisers).
With the current public sector rules the PSC has no legislative appeal mechanism against an end client decision as to whether or not the engagement is within IR35 or not.
If there is no appeal mechanism available to the PSC then I fail to see how, in the interest of justice, the PSC could be potentially penalised further. The main objective of these changes was to take the decision-making process out of the hands of the PSC. It would be unconscionable to hold a party liable to something they have no power in deciding and have no power to disagree with.

Q10. What systems and process changes would businesses need to make?
As with the public sector changes, end client organisations will have to invest in additional compliance and contracting procedures. The guidance provided by HMRC on the public sector legislation and IR35 itself was (and remains) inadequate to provide a definitive answer to companies on whether an engagement should or should not be within the legislation.

Q11. Would there be any process and administrative cost implications for businesses? Can you provide evidence of the scale and nature of these?
 The cost implications will depend upon the size of the end client organisation. Most, if not all, companies will need external advice which will come at a price: they will need to retrain or hire in staff to deal with contracts. While the costs may be comparably the same for both larger and smaller businesses, the impact on smaller businesses will be significantly greater.
To compile any useful evidence on the scale and nature of administrative costs would be a sizeable undertaking more appropriately undertaken by an independent research company or perhaps the Department for Business, Energy and Industrial Strategy (BEIS) or the Office for National Statistics (ONS).
Simply because a compiled, evidential listing of costs has not been produced does not negate the fact that there will be significant costs for the majority of businesses.

Q12. Can you provide any evidence that these costs would vary depending on how much notice businesses were provided for the introduction of any reform?
Undoubtedly the more notice companies have the more time they have to train up internally; whereas a short notice period would mean hiring in new staff or paying out for consultancy advice.
As mentioned above, if the basis upon which IR35 is to be judged changes, it would seem sensible to give companies and advisers ample opportunity to gain knowledge and understanding of the new rules before implementing a new administrative mechanism. This would ultimately provide companies with the optimum opportunity to ensure compliance with the legislation.
Q13. Is there anything else HMRC could do to ease the implementation for businesses, and can you provide evidence of how this would ease implementation or administration for businesses?
As mentioned throughout this response there are many thing HMRC could do to ease the administrative burden. Fundamentally it comes down to improved guidance and providing companies with the ability to assess, definitively, IR35 status more easily (and more accurately) than is currently provided. I fail to see how any business could efficiently and accurately determine IR35 status using what has correctly been made available by HMRC.
I do not see how any useful evidence can be provided to demonstrate how this would ease implementation or administration. One would have to canvas opinion on a large scale to provide any useful data.

Q14. Overall, what are your views on this option? Would it be a proportionate response to the issue?
To place responsibility on the end client organisation to carry out appropriate checks provides no real difference than the proposed legislation; it is simply that different checks are being made. The administrative and financial burdens would still be present. Notwithstanding that it is a little odd for a government department which discusses at length the problem with inserting clauses into contracts is now encouraging the insertion of clauses into contracts, and the fact it is recommending the use of CEST when it has publically stated the CEST is not definitive and cannot be relied upon.

Q15. If the government were to pursue this option, what checks should the client be required to perform?
They should be no more and no less than what the law says is required in order to demonstrate whether the hypothetical contract is one of service.

Q16. How should different views on employment status be dealt with? For example in the public sector, disputes should be resolved between the client and the worker, which ultimately allows either party to walk away if they do not agree.
This position in the public sector is unsatisfactory. It should be addressed in the public sector before any similar changes are made in the private sector. To do nothing serves only to hinder smaller business and provide unfair working practices to contractors.

Q17. How would HMRC best enforce compliance with securing labour supply chains, keeping in mind the need to mitigate or reduce dealing with each PSC individually?
If the intention is to increase compliance within the industry then potential exposure to tax and NI liabilities would seem the only sensible options. A penalty regime produces income to the Exchequer but does not address the issue of compliance at its core (it depends on whether the intention is to drive more income or improve compliance).

Q18. Should the requirement be underpinned by some form of penalty?
See above answer.A penalty regime produces income; it does not, of itself, improve compliance. Perhaps incentivising for being compliant rather than penalising for being noncomplaint could be an alternative option?

Q19. Should the requirement be underpinned by denying the client a deduction for the cost of labour from an unchecked supply chain?
This would require legislative change and clear guidance on what would not constitute an allowable deduction.

Q20. Should the requirement be underpinned by the risk that the client could be named as having used a non-compliant supply chain?
The question is: would naming and shaming dissuade agencies and contractors working for that client? I would suggest it would not.

Q21. Would such penalties effectively change behaviour within labour supply chains, helping to ensure the correct income tax and NICs are paid?
As above. Penalties are only effective if compliance is dealt with fully and effectively.

Q22. What would the impact (including the effect on administrative burdens) of this option be on affected businesses, agencies, and individuals?
In reality the bulk of the administrative burdens would be laid at the feet of the agencies (who in turn would seek some information from the individuals and their advisers). The end client holds all the power in the supply chain, so while they retain the responsibility they could quite easily pass the administrative burden down to the agency (and make it a pre-requisite for any agency which wants their contract).

Q23. How effective would this option be in addressing non-compliance with the offpayroll working rules in the private sector?
I am yet to see any empirical data which adequately quantifies the level of “noncompliance” within the private sector and as such this question cannot be answered with any degree of certainty.Operating outside of IR35 is not tantamount to “non-compliance”.

Q24. Is there any way to improve this option which would make it more effective?
As highlighted above, clearer guidance and focus on compliance (as opposed to arbitrary penalties).

Q25. Overall, what are your views on this option? Would it be a proportionate response to the issue?
If the liability remains with the PSC then I fail to understand why the additional record keeping should not sit, in the first instance, with the PSC (unless this pre-supposes the PSC is not a trustworthy body to keep such information). If this information already exists for each of the parties in the chain then perhaps if HMRC were more efficient in approaching each of the parties there would be no need to place the additional burden on the end clients.
This also raises a number of further questions in respect of PSCs, but mainly “At what point does a PSC know it is under enquiry?” and “Would HMRC rely solely on the information gathered by the end client and simply notify the PSC it is liable?”.

Q26. If the government were to pursue this option, what information should be required to be gathered?
It should simply be such information as is required to determine whether IR35 applies in law.This will be dependent on what, if any, changes are made to determining what constitutes a contract of service.

Q27. How could the government ensure that others in the labour supply chain pass accurate and timely information to the client?
This could only be done by legislative means.

Q28. What penalties should fall on the client or others in the labour supply chain if they fail to comply with the requirement?
Perhaps, rather than automatically imposing a penalty regime, the records could be specifically detailed as required for internal compliance purposes (much like PAYE record keeping provisions).

Q29. What would the impact (including the effect on administrative burdens) of this option be on affected businesses, agencies, and workers?
Again the impact will depend on the size of the business. The private sector is not a standardised group of companies.

Q30. How effective would this option be in addressing non-compliance with the offpayroll working rules in the private sector?
Please see answer to Q23.

Q31. Is there any way to improve this option which would make it more effective?
Place the onus on the PSC to retain the information and make it a requirement for clients and agencies to provide the PSC with this information.

Q32. Are there other options, within the scope of this consultation as set out in Chapter 2, that would be effective ways of tackling non-compliance in the private sector that the government should consider (for example, possibly drawing on lessons from other countries)?
Please see answer to Q23.

Q33. Would these, or any of the other options outlined above, be more effective than extending the public sector reform? If so, how would they be more effective and on what grounds would they be preferable to extending the public sector reform?
As mentioned above, these reforms would be unnecessary if the government invested in its own administrative department which is charged with the responsibility of ensuring tax compliance.
Imposing additional self-policing legislation, penalties and burdens on taxpayers to carry out the functions of a government department does not address the core issue of compliance. This can only be effectively addressed and managed with an independent review of HMRC’s current efficiency, training and resources and an investment in improving those areas where needed.

Q34. Are there any other issues which businesses or individuals who may be affected would like to raise?
The responses above provide the main summary of the issues our clients would like to raise.In the main they can be broken down into three main areas:
  1. The private sector is not a standard. It is not the same as dealing with the public sector.  The private sector encompasses a multitude of different enterprises, professions and corporate structures. To impose a unilateral legislative reform which does not take into consideration the complexities and differences of each type of business would be unconscionable.
  1. The public sector legislation does not adequately address the issue in its entirety and the guidance provided in respect of the public sector and IR35 is inadequate. This should be addressed before any consideration is given to the appropriateness of imposing them onto the private sector.
  1. The government needs to radically address the shortcomings of HMRC. More staff are needed, with better training for all staff, closer working relationships with business and clearer guidance on the law. There should not be such a disparity between HMRC’s opinion and approach and the Courts’ opinion and approach.   
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