HMRC’s impact statement regarding the introduction of the Off-Payroll rules to the private sector has been accused of being "full of fantasy and falsehoods”.
A policy paper, ‘Rules for off-payroll working from April 2020’, was published on 11 July to accompany the publication of draft legislation for the planned changes. According to ContractorCalculator CEO Dave Chaplin, the document contains several spurious statements and figures that fail to stand up to basic scrutiny:
“Considering the fact that draft legislation has been published fewer than two months after the consultation closed, it’s not particularly surprising that HMRC has taken zero feedback into account. However, some of the claims and figures used to justify its aim of ushering in the Off-Payroll rules in their current, errant form are frankly laughable.”
Firms and agencies expected to budget £180 for Off-Payroll prep
Arguably the most immediate impact felt by businesses will be the one-off costs incurred in preparation for April 2020. HMRC estimates that roughly 60,000 hiring firms and 20,000 recruitment agencies will be affected by the rules. Their one-off costs will typically include:
- Familiarisation with rule changes
- Upskilling staff with regards to making status determinations
- Determining whether existing engagements are within scope of the rules
- Implementing IT systems and processes to manage compliance.
Despite this heavy burden, HMRC projects that the ‘one-off impact on administrative burden’ on UK business will total £14.4m. When divided by the combined 80,000 firms and agencies that HMRC has identified, this works out at an average cost of £180.
“It takes HMRC three years to train its own inspectors to a sufficient degree on employment status matters. How it expects 80,000 organisations to do the same in a matter of months on a budget of £180 is anybody’s guess,” says Chaplin. “Implementing IT systems to operate payroll in time for April 2020 alone will have a huge impact on the budget of most agencies – far greater than £180.”
HMRC’s estimate is all the more dubious when considering the public sector experience. The National Audit Office (NAO) report into the BBC’s adoption of the Off-Payroll rules revealed that the broadcaster’s costs for preparing for the legislation amounted to £1.5m, as of October 2018.
Meanwhile, HMRC’s own study the public sector changes, which evidence suggests has downplayed their impact, claims that central bodies spent an average of £7,550 setting up systems and processes necessary to implement the reform.
HMRC estimates ongoing compliance cost of just £10 per contractor
Hiring firms and agencies will also have numerous ongoing compliance costs to deal with, which HMRC acknowledges will include:
- Making status determinations for new off-payroll engagements
- Maintaining a ‘status disagreement process’ to handle status disputes
- Accounting for and reporting tax liabilities through Real Time Information (RTI).
According to HMRC, the estimated ongoing costs accumulated by companies will amount to just £5.3m. Coincidentally, the taxman also estimates that personal service companies (PSCs) will make roughly £5.3m in administrative savings, having been relieved of the responsibility of determining status and the associated accounting burdens. As Chaplin highlights, the figures are woefully misleading:
“There are approximately 500,000 PSC workers, all of whom will need to be assessed for the contracts they undertake. This figure means a cost to the firm of £10.60 per assessment, and that is if each contractor is only assessed once. This is miles short of the assessment costs being quoted in the current market, which are typically in excess of £100.
“Of course, this is all before we have even considered the cost of managing such a process, including HMRC’s unworkable ‘status disagreement process’, which itself will give rise to litigation costs as contractors inevitably challenge their deemed status.”
Chaplin adds: “As for PSCs, contractors have been determining status themselves for 20 years, and are far better placed to do so than the HR department at a client company. It isn’t a burden for them – it is part and parcel of being a contractor. The accounting burden will also likely increase with many accountants required to process accounts consisting of both ‘inside’ and ‘outside’ contracts.”
‘Insignificant economic impact’ claim conflicts with facts
In a section consisting of just two sentences, HMRC concludes that the reform is to have no significant macro-economic impacts. The taxman’s evaluation is surprisingly lightweight considering the evidence from both the public and private sectors:
- 52% of public sector hiring managers reported rising costs, delays and project cancellations as a result of Off-Payroll in a June 2018 study by the Chartered Institute of Personnel and Development (CIPD)
- 87% of NHS locums told a ContractorCalculator survey that the reform had impeded patient care
- An October 2017 report by Transport for London (TfL) attributed a three month project delay to contractors departing following the rule changes.
Meanwhile, the effects are already being felt in the private sector. Banks such as HSBC, Morgan Stanley and M&G have imposed blanket bans on PSC contractors to negate tax risk and compliance requirements. This will inevitably result in mass contractor walkouts, intensified skills shortages and significant hiring challenges.
Although HMRC claims that a behavioural adjustment has been made to account for contractors shifting their structure to mitigate tax changes, the extent of this shift shouldn’t be underestimated.
Following the public sector changes, there were reports of the emergence and widespread adoption of tax avoidance schemes, often entered into by unwitting locums seeking to negate excessive tax bills imposed by Off-Payroll and non-compliance amongst clients. This is an issue which has been acknowledged by an HMRC senior official and which threatens to snowball with a private sector rollout.
Similarly, the behavioural impact is the largest threat to the anticipated Exchequer impact, the figures for which HMRC has lifted from the Budget 2018 document. The numbers suggest that the Off-Payroll will yield £725m by 2023/24. However, Chaplin explains why they are no more than guesswork:
“These are old figures, to which the Office for Budget Responsibility (OBR) assigned the highest uncertainty rating of ‘VERY HIGH’ due to the fact that it had no data whatsoever on the behavioural impact. Though HMRC has attempted to, nobody can legitimately attribute any real substance to these numbers. This is a blatant example of blind policy making.”
Are 153,000 contractors set to lose 25% of earnings?
HMRC estimates roughly 170,000 PSC contractors will be affected by the legislation. Assuming the taxman’s view that only 10% of those who should be complying with IR35 currently are, this leaves a presumed 153,000 contractors who will be subject to tax hikes as a result of Off-Payroll.
Though HMRC argues that ‘these individuals will be required to pay tax at the correct levels’, it appears more likely that affected contractors will instead suffer an extortionate 20-25% reduction in income, as Chaplin explains:
“There have been widespread reports, and in some cases evidence of, clients unlawfully deducting their employment costs from the earnings of ‘deemed employees’ in the public sector.
“Given that these costs are supposed to amount to an additional 14.3% paid on top of the contract income, contingent workers deemed within scope of the rules have consequently lost between 20-25% of their income overnight. This is all without being granted the employment rights that their tax status warrants.”
Chaplin continues: “Whether 153,000 private sector contractors will suffer the same fate is hard to determine. HMRC clearly overestimates the prevalence of non-compliance, judging from its dismal record at IR35 tribunals, where it has outright won just one of the past 14 cases.”
However, there is every chance that more contractors could be falsely deemed ‘inside IR35’ and subject to unfair and unlawful tax deductions where the Check Employment Status for Tax (CEST) tool is concerned. Use of CEST as part of a blanket approach has seen the likes of Network Rail and HS2 find 99% and 98% of contractors within scope of the rules, respectively.
What other impacts has HMRC failed to consider?
HMRC’s closes its impact statement by noting: ‘Other impacts have been considered and none have been identified’. Chaplin, who has identified dozens of further impacts, finds this astonishing:
“HMRC’s failure to consider literally dozens of factors shows that it has little concern for the impact of the legislation on UK productivity, industry, plc, taxpayers, and the concept of paying the right amount of tax.”
Impacts to consider identified by ContractorCalculator include:
- Inability to claim for travel expenses will limit contractor’s range and options
- Subsequent vacancies will be impossible to fill due to commute distances
- Many contractors will quit or retire, reducing the flexible workforce and causing lost tax revenue
- Contractors will take contracts overseas, and UK contractors will be replaced by those from abroad
- Many contractors will move back to lower paid perm work, as contracting becomes unviable
Impact on firms
- Extra taxes and higher contract rates for ‘inside IR35’ contracts will increase costs for hiring firms
- ‘Inside IR35’ contracts will be avoided - firms will struggle to fill maternity/paternity leave
Business sector impacts
- Up to 1,000 accountants could go out of business
- Insurance providers revenues hit if contractors no longer need PI insurance
- Loss of recruitment business revenue
- Project delays and cancellations, and struggles to source talent
- Impact on entrepreneurial activity - contractors no longer expanding their business
- Forced remote working doesn’t work well for certain roles and teams
Impact on UK plc
- Subject matter experts will take their skills to other countries
- Big shortage of on-demand skills - especially niche skills
- Deepening skills shortages, compounded by fewer new entrants into the freelance market
Impact on individuals, earnings and livelihood
- The lower paid will suffer a considerable loss of income
- Some contractors will move to full-time employment, earning less
- Contractors forced into employment may have to sell their homes
- Pension savings will reduce in accordance with reduced income
Court and legal issues
- Litigation between contractors and clients over status disagreements
- Employment tribunals backlog as contractors seek rights
- More taxpayer money wasted for every IR35 tribunal defeat for HMRC
Impact on tax revenue
- Tax revenue decreases due to individuals taking lower paid permanent jobs
- Emergence of tax avoidance schemes, as witnessed in the public sector
- VAT revenue decrease (many financial insurance businesses can’t offset contractor VAT)
- Expenses: A non-trivial fraction of that economic activity will just disappear from those going perm
“HMRC has misled MPs and the public for too long,” Chaplin concludes. “We can’t wait until beyond April 2020 for this realisation to sink in. To help prevent the damaging consequences of the Off-Payroll legislation that HMRC has overlooked, and the many more that it has arrogantly dismissed, we urge contractors to join our campaign – Stop the Off-Payroll Tax.
“To sustain flexible working in the UK as we know it, we need the full support of the sector. Please join the campaign and follow our guidance on how to secure a lobbying pack and meet with your MP. Should life-changing legislation be introduced in April 2020, nine months from now, and you haven’t done your bit to prevent it, you will only have yourself to blame.”