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HMRC’s £1.3bn non-compliance claim in Off-Payroll consultation doesn’t align with OBR

Further doubts have been cast over HMRC’s integrity after ContractorCalculator's analysis reveals that HMRC's claim that the cost of private sector non-compliance with IR35 will reach £1.3bn by the 2023/24 tax year doesn’t align with projections from the Office for Budget Responsibility (OBR).

The figure, included in the taxman’s recent Off-Payroll consultation, has also recently been quoted in correspondence from Chancellor Philip Hammond in an attempt to justify the proposals.

It is unclear where the £1.3bn estimate has arisen from, as it has not been certified by the OBR, the Government body responsible for providing economic forecasts of public finances. Meanwhile, the OBR’s policy measures database shows that the Off-Payroll rules are expected to net the Exchequer £661m in 2023/24 – effectively half of what HMRC has claimed.

“HMRC has doubled up on the OBR’s estimate, and has used its mystery figure to mislead and portray non-compliance as a far greater issue than it actually is,” comments ContractorCalculator CEO Dave Chaplin. “This once again reinforces the desperate need for accountability within the UK tax system.”

How has HMRC reached its £1.3bn non-compliance figure?

In October 2017, Financial Secretary to the Treasury Mel Stride quoted a similar statistic before Parliament, claiming the cost of tax losses to the Exchequer due to non-compliance would reach £1.2bn by 2022/23. This, he noted, was based on projections made within the OBR’s 2017 Fiscal Risks Report.

Notably, the OBR’s forecast for the ‘Exchequer impact’ of the private sector Off-Payroll proposals excludes the tax yield from small businesses. This is due to the small company’s exemption which excuses qualifying companies from applying the rules.

Supposing this is the sole reason for the discrepancy, it would suggest that HMRC estimates contractors engaged by ‘small’ companies are accountable for £639m of private sector non-compliance. For Chaplin, this seems dubious:

“Government doesn’t have data to determine the portion of private sector contractors engaged by firms meeting the small company’s exemption criteria. Even if it did, if non-compliance with IR35 is considered such a prominent issue, why introduce a clause to impending legislation which automatically excludes half of the supposed offending contractors from its scope?”

Is HMRC’s estimate based on false assumptions?

Small company’s exemption aside, there are numerous questions over the credibility of estimates based on the OBR’s Fiscal Risks Report, ContractorCalculator analysis of which reveals that its cost forecast was based on two critical assumptions:

  • That the portion of self-employed of total employment would continue its upward trend beyond 15% to 15.7% by 2021/22
  • That the incorporated population would rise by 4% each year until 2021/22.

The OBR noted that there were “risks in both directions around the underpinning assumptions”, a warning which has since been vindicated as neither assumption has materialised.

As of October 2018, labour market statistics from the Office for National Statistics (ONS) show that the portion of self-employed has since declined to roughly 14.7%. A slump in the number of incorporated companies during 2017/18 was also compounded by an increase in the number of companies dissolved.

“If we are right to assume that HMRC’s estimates are based on these dated and dubious forecasts, it brings an already contentious legislative proposal into disrepute,” notes Chaplin.

“It’s also worth noting that plans to lower the Corporation Tax rate to 17% by April 2020 will have further distorted any conclusions as to the supposed ‘cost of non-compliance’.”

OBR uncertain over verified estimates

Even when ignoring the bloated estimate, and taking only the verified figures into account, there is a great deal of uncertainty surrounding the anticipated tax yield of the Off-Payroll rules.

In analysing its policy costings (see OBR Annex A, page 234, item 54), the OBR gave its forecast for the Off-Payroll rules an uncertainty rating of ‘very high’. The most important contributing factor was deemed to be behavioural, which was also given an uncertainty rating of ‘very high’. The OBR acknowledged a number of contributing factors, including:

  • No information on potential behaviour was available
  • There was ‘very little data’ to base the forecast on
  • The data that was available was of ‘poor quality’
  • There were significant modelling challenges.

The Treasury has also claimed, in letters to constituents seen by ContractorCalculator, that the methodology and assumptions used for the private sector forecast are aligned with those used to estimate the financial impact of the public sector reform.

“By its own admission, the OBR’s estimate is not meaningful,” comments Chaplin. “Of further concern is the Treasury’s claim that analysis for the private sector followed the framework for the public sector – an entirely different beast.

“The public sector, and the contract positions therein, are far more heavily regulated than the private sector. As a result, applying the same assumptions to the private sector is bound to result in overblown estimates as to the impact on the Exchequer, regardless of the level of certainty. Forget about £1.3bn – Government will do well to recoup £661m from the Off-Payroll rules come 2023/24.”

How else could Government recoup supposed shortfall?

Given the contention and uncertainty surrounding the Off-Payroll rules, Government would be advised to explore other avenues with its tax collecting efforts. A glance over the OBR’s policy measures database reveals a number of simple measures which would be expected to yield similar sums to that which HMRC claims is lost to non-compliance:

  • Cancelling the fuel duty freeze for 2019/20 would save roughly £935m by 2023/24
  • Proposed restrictions on the measly Employment Allowance are expected to yield £322m by 2023/24 – cancelling the allowance altogether could save a lot more
  • Plans to delay the NICs Bill by one year and maintain Class 2 NICs is expected to yield £345m by 2023/24.

Since IR35’s inception, HMRC has been consistently criticised for its pursuit of the ‘low hanging fruit’ that contractors represent, while failing to retrieve what it is owed by large corporations.

This was underlined once more recently when a Mail on Sunday investigation revealed that 13 of the UK FTSE 100 companies had either paid no Corporation Tax in the UK, or had received a tax credit from HMRC. This included the likes of BP and Royal Mail. Meanwhile, last year, online retailer Amazon revealed that its Corporation Tax bill had almost halved, despite its UK profits tripling.

Meanwhile, leading UK tax barrister Jolyon Maugham is currently locked in a legal battle with Uber, on the grounds that the transportation network company should be paying VAT on its services offered. Should Uber lose, HMRC could then seek VAT payments dating back four years, amounting to a sum which Maugham has noted could reach £1bn.

Government’s pledge to reduce the Corporation Tax rate to 17% by April 2020 is also a costly one. While the OBR’s policy measures database suggests that it will cost the Exchequer roughly £1bn by 2023/24, recent analysis of HMRC data has suggested the loss of revenue from the planned cuts could equate to more than £6bn.

This is a measure which it would make some sense to sacrifice, especially in the context of IR35, as it would deter from what HMRC perceives to be widespread tax-motivated incorporation.

Editor technical note: The figures by the OBR for the off-payroll exchequer impact are found in their policy measures database. The £661m figure is obtained by summing rows 1597 to 1600 in column BF. The OBR figure, quoted in their Policy Costings 2018 paper is £725m for the year 2023-24. We understand from the OBR this also takes into account 'devolved Scottish income tax and the consequential block grant adjustment'. Either way, the figure certified by the OBR is still around half the £1.3bn quoted by HMRC.

Published: Friday, 15 March 2019

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