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Contracting stakeholders raise concern over T&S changes and public sector IR35 reform

Umbrella contractors could struggle to find companies willing to process expenses as there is still much concern amongst umbrella firms over the application of the newly implemented legislation on travel and subsistence (T&S) expenses tax relief.

The Freelancer and Contractor Service Association Compliance Seminar – held on 11 April - gave umbrella providers, accountants and relevant contracting stakeholders an opportunity to address changes to T&S, as well as the proposed public sector IR35 reforms.

Attendees expressed concern over the lack of clarity offered by HMRC with regards to rules surrounding ‘supervision, direction or control’ (SDC), the extent of the burden placed on umbrella companies, and the implications of mistakenly processing contractor expenses incorrectly. Meanwhile, experts were on hand to advise attendees on how to continue to process expenses compliantly.

With HMRC representatives also in attendance, ContractorCalculator CEO Dave Chaplin expressed his own concern over the perceived naivety of HMRC’s belief that it can create an online IR35 that will give a simple inside/outside answer – referring to the plan as: “Disneyland thinking”.

Lack of clarity imposes greater burden on umbrella providers

The main challenge posed by attendees concerned whether the commercial viability of processing contractor expenses would remain for umbrella companies, given the lengths they would have to go to in order to do so. HMRC’s recent guidance stipulates that it is down to the umbrella company to prove that SDC does not apply if they want to process expenses for a contractor.

However, it has offered no indication as to what constitutes sufficient evidence, other than insisting that signed waivers and generic written statements confirming that the manner the contractor carries out their work isn’t subject to SDC won’t be adequate.

Tax manager at Ernst & Young and former HMRC tax investigator Robert Burton conceded that in targeting the non-compliant, HMRC has a tendency to overlook how legislation might affect those who play by the rules.

“When you’re drafting out legislation, all you’re concerned about is how logical and fool proof your arguments are, and it’s easy to lose sight of those in the middle ground who are trying to do the right thing.

“Umbrella solutions are there to provide a service. But at the same time, they want to limit the possibility of any financial liability coming back to them. Ultimately it’s all about how comfortable they feel with regards to their level of compliance activity and the risk associated with processing expenses, which is what they should base their decision on.”

Umbrellas encouraged to adopt well-rounded approach

Umbrella providers – and contractors - may not be too enthused by the advised course of action. With little in the way of assistance from HMRC, experts encourage umbrellas to adopt the ‘mosaic’ approach when determining whether to process contractor expenses.

This would incur gathering as much evidence as possible to help determine a contractor’s SDC status, granting equal consideration to each piece of evidence. This would allow umbrellas to look at the picture as a whole, reaching a reasoned conclusion in the process.

The expectation is that HMRC investigations would be carried out a lot quicker in such instances, with investigators only likely to issue assessments where non-compliance is perceived.

Whilst following these measures would also almost certainly display sufficient due diligence on behalf of the umbrella companies concerned, it again poses questions as to the viability of processing expenses. As a result, it has the potential to act as a deterrent, costing contractors in the process.

Ambiguity intended by HMRC?

Whilst contractors were less than enlightened by HMRC’s updated guidance on SDC, a lot of emphasis was placed on HMRC’s interpretation of ‘personally providing services’.

This was granted significant weight as changes to the agency legislation have closed a loophole whereby a contractor could avoid being placed on the payroll by proving no personal service was provided, simply by including a substitution clause in the contract.

“I think we were all expecting the recent HMRC guidance to go into a bit more detail regarding SDC than it actually did,” admitted John Chaplin, Ernst & Young executive director. “I think the greater emphasis placed on PSCs is a reflection of HMRC’s determination to eliminate abuse of the agency legislation.”

Meanwhile, Burton attributed the ambiguity partly to HMRC’s desire not to lend a helping hand to less compliant umbrella companies: “For HMRC to set out a list of prescribed forms of evidence that it would consider would draw a line in the sand. What this would mean is any umbrella company that wanted to play around on the edge of compliance would be given a big helping hand.”

HMRC struggles to defend public sector reforms

Contracting stakeholders were similarly vocal during the afternoon session where representatives from both HMRC and the Treasury were on hand to outline plans to reform IR35 legislation in the public sector.

With the plans still in their early stages, both representatives were unable to provide convincing answers to many questions. HMRC’s Julie de Brito reiterated Revenue statistics indicating that non-compliance is costing the Treasury £400m each year, and that 90% of those who should be applying IR35 rules aren’t doing so. However, she was unable to elaborate on these figures when pushed by attendees to do so.

Meanwhile, despite HMRC’s insistence that it is not imposing a new tax liability upon affected workers, attendees highlighted that the risk-averse nature of some public sector engagers could see some contractors unfairly placed on the payroll and taxed at a higher rate as a result.

“We’re hoping that the tests and the [online testing] tool together can provide enough certainty for public sector engagers so that they don’t feel the need to be too risk-averse. We don’t want to put anybody on the payroll who shouldn’t be there,” de Brito responded when questioned about this possibility.

Online tool capabilities are “Disneyland thinking”

However, this prompted further debate over the abilities of HMRC’s ‘simple’ online tool. HMRC has a notoriously bad track record with regards to developing online solutions and many have called into question its overly-ambitious plans to develop a tool that can conclusively determine a contractor’s IR35 status.

Dave Chaplin questioned whether HMRC were aware of the challenges facing the development of an online tool: “We built an online IR35 tool many years ago that has 53 questions and has now been used over 90,000 times by contractors.

“After significant analysis, the best we could offer was a result on a spectrum from pass through to fail, and 40% of the users fall into the grey area where the decision could go either way. Are you suggesting you can make a simpler tool that gives a binary answer?”

When called into question, John Couzens of the Treasury was quick to backtrack, conceding that the tool probably wouldn’t be as determinate as previously suggested, adding: “We can safely say it will be an improvement on where we are now.”

Plenty more work to be done by HMRC

Predictably, there are still many grey areas surrounding the proposals. One of which concerns the frequency at which contractors will be required to take the online test to determine their status. As highlighted at the seminar, a contractor’s status can change midway through a contract.

In 2011, IT contractor John Spencer was determined to have been both inside and outside IR35 at a single workplace – a tax tribunal determining that he was outside IR35 for the first three years of a contract, though not for the subsequent four.

Both speakers confirmed that this would be decided upon following consultation, which is due to take place in the summer. Stakeholders are encouraged to provide input.

Representatives were also asked whether contractors who are subject to the same taxation as employees would receive the same employment rights, but declined to answer as the topic wasn’t determined to be within the remit of discussion.

One audience member asked simply: “If Government are concerned that people are being hired off payroll and that they should take a test to see if they are inside IR35, why not simply only hire people on fixed term contracts, and forget about the test?” HMRC responded that this was the kind of feedback they would be seeking in their round table discussions.

John Chaplin suggested that if the rules are introduced then the likelihood is that any public sector roles that were inside IR35 would be advertised as such, removing the potential complexity that would arise from a negative assessment after the contract had started.

‘When, not if’ for the private sector

Since the announcement, there has been significant concern that the changes to public sector contractor engagement are merely the first step in a mass rollout into the private sector.

Couzens and de Brito insisted that this isn’t the case when asked whether the availability of the impending IR35 tool to private sector workers is an indication of the Government’s future plans, although others weren’t convinced.

“With regards to the public sector IR35 changes, I’m worried,” admitted Stuart Farrow-Smith, head of employment taxes at Capita. “I think when it comes to consultation we should go into it anticipating that it will be extended to the private sector. I believe it’s a matter of when, not if.”

“They are using the public sector as the guinea pigs,” added Chaplin. “I can’t see how the Government would be able to justify a worker paying tax at a different rate to another as a result of what sector they work in.

“I think at the end of the day it’s probably 50/50,” Chaplin concluded. “There’s a 50% chance that they will implement something ready for 2017/18, and a 50% chance that it will be rolled out into the private sector if it’s perceived to be working.”

Published: 12 April 2016

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