Government’s reasoning for implementing the Off-Payroll Tax was called into question in the House of Lords yesterday as experts slammed the lack of evidence to support HMRC’s assertions of widespread non-compliance with IR35 by contractors.
Concerns were also raised about the exploitation of workers via ‘bogus self-employed’ engagements during the latest Finance Bill Sub-Committee hearing, an issue which evidence suggests will likely be intensified by the Off-Payroll Tax.
With the private sector Off-Payroll implementation just weeks away, further arguments were put forward for the alignment of employment status for tax and employment rights purposes to prevent the exploitation of flexible workers.
Where is HMRC’s evidence of IR35 non-compliance?
Though HMRC estimates that only 10% of contractors who should be operating inside IR35 are doing so, this figure has never been substantiated. Professor Patricia Leighton of the Centre for Research on Self-Employment (CRSE) took aim at the taxman’s failure to provide any credible evidence of non-compliance to justify the Off-Payroll legislation, as well as HMRC’s discourse surrounding IR35 that has often portrayed contractors in a negative light:
“There isn’t any real evidence. I haven’t seen a survey, study or investigation. The language used by HMRC to deal with IR35 suggests that I am at best a criminal and that we’re all engaged in practices that are bad for society, the economy and the revenue. When making a change like this, I really do feel that there should be better evidence establishing the scale of the problem.”
HMRC has also failed to convincingly counter evidence of the failings of its Check Employment Status for Tax (CEST) tool. A recent ContractorCalculator survey of more than 12,000 contractors found more than half of clients are using CEST to conduct status assessments despite its well documented flaws, which Leighton cited, adding: “CEST is universally criticised. The test itself is a dog’s dinner, and that’s leaving aside the other issues.”
Employment status ambiguity causing exploitation of workers
Contrary to the taxman’s assertions, evidence suggests that much abuse of the employment tax system is concentrated at the other end of the supply chain. Siobhan Endean, national officer for equalities at Unite the Union, warned the committee of the impact that a lack of clarity over employment status is having on vulnerable workers in the gig-economy:
“We’re seeing a proliferation of insecure work, and complex relationships between workers and suppliers that are distorting the true nature of the employment relationship. What’s arisen from this is bogus self-employment. The key issue for us is whether that is a relationship that people want to enter into when they work for a company.”
Endean also acknowledged that, for many workers, a precondition for the acceptance of work is to agree to engage via contrived arrangements, stripping them of the employment rights that their actual working practices should warrant while imposing upon them unnecessary and unfair costs. Reading a statement from an umbrella worker represented by Unite the Union, she added:
“I pay an umbrella company up to £100 per week to get my own wages. I have no holiday pay or sick pay. My holiday pay is actually a percentage of my net income which is taken off. Then when I get it back it’s at gross, so it’s taxed twice. I also pay both employers and employee’s National Insurance Contributions (NICs).”
Leighton added that, instead of focusing on contractors that are supposedly gaming the system, HMRC’s time would be better spent identifying malpractice by clients: “We ought to have some sense of to what extent misclassification is due to the practices of clients who are requiring people to pretend that they are self-employed. I just see them as victims personally.”
Employment status alignment needed to quell abuse
This issue is expected to be intensified by the introduction of the Off-Payroll Tax, which enables hiring organisations to render workers ‘employed for tax purposes’, while granting workers little chance of mounting a successful challenge against their deemed status. For Endean, the solution is relatively straightforward:
“What’s of real concern is that the Off-Payroll legislation creates employment for tax purposes and not for employment rights purposes. There’s a danger there of creating a new classified group of workers without any employment rights. If you were to align employment status for rights and tax, it would make a massive difference in tackling bogus self-employment.”
Endean’s comments echo similar calls made during previous committee hearings, and from Government’s own Good Work Plan. However, HMRC has so far stubbornly insisted that employment rights are outside the scope of the Off-Payroll legislation.
The refusal to consider the matter holistically is to create further difficulties for contractors, who have been stripped of many perks of self-employment by the Conservative Government in recent years. For Leighton, who predicts a decline in self-employment, the Off-Payroll Tax is expected to prove to be the tipping point for many contractors.
Considering the legislation in relation to the costs that many self-employed themselves fund, including those for training, administration and finances, she argued: “These changes would create a real sense of resentment and unfairness. People will begin to think: ‘We’re bearing risk, we’re bearing costs, but what is the point?’.”
HMRC ‘soft landing’ a cause for concern
When asked whether Government was right to press ahead with the changes, experts highlighted the promised ‘soft landing’ approach as a cause for concern. In its recent review of the proposed changes, the Treasury confirmed plans to ease the status assessment burden on hiring firms, stating: ‘Customers will not have to pay penalties for errors relating to off-payroll in the first year, except in cases of deliberate non-compliance.’
However, for Leighton, this concession by Government is indicative of its own uncertainty regarding the legislation: “HMRC has said they won’t initiate proceedings against people who have ‘got it wrong’. I have no idea what they mean by that. It can only be proven ‘wrong’ when tested in a law court.
“HMRC is effectively saying: ‘We’re not that confident. We’re just going to let this bed in and see what happens.’ Personally, as a taxpayer, I feel very worried about this. Somebody should stop and think.”