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IR35: Government offers ‘tired old rhetoric’ in response to Lords Off-Payroll report

HMRC and the Treasury have published a disappointing response to the House of Lords Finance Bill Sub-Committee’s report on Off-Payroll working, acknowledging many of the issues addressed during the inquiry yet failing to propose any proactive solutions.

“It appears that the threat of losing the recent vote on the amendment resulted in the Treasury and HMRC having to make considerable assurances that the implementation would not have an adverse effect on the UK’s valuable flexible workforce,” comments ContractorCalculator CEO Dave Chaplin.

“However, the response merely pays lip-service to the fundamental flaws in the reforms, and provides no more than tired old rhetoric and vague promises that HMRC will help businesses prepare. Don’t hold your breath.”

Taxman’s debunked arguments fail to justify CEST failings

HMRC’s Check Employment Status for Tax (CEST) tool was a recurring subject of contention throughout the Lords inquiry, and duly received much attention within the report which described CEST as ‘not fit for purpose’. Defending the tool, Government argued: ‘The current CEST tool was rigorously tested against employment status case law.’

“It’s staggering that Government continues to publish the same debunked messages about CEST being robustly tested,” comments Chaplin, alluding to HMRC’s sustained failure to provide any adequate testing documentation. “It’s interesting to note that Government also failed to address CEST’s omission of mutuality of obligation (MOO), a key element of case law.”

Significantly downplaying the complexity of employment status, HMRC and the Treasury went on to argue: ‘In the vast majority of situations, employment status decisions are straightforward’, before elsewhere suggesting that a hirer’s compliance responsibilities needn’t stretch beyond conducting a status assessment using CEST.

“Any hiring firm taking this advice on face value is setting itself up for a costly fall,” says Chaplin. “HMRC’s defeat in the Lorraine Kelly IR35 tribunal case, which the judge described as ‘not a borderline case’, goes to show that employment status is far from straightforward. Meanwhile, any company that fails to document its engagements with contractors is affording itself no protection in the event of an HMRC tax investigation.”

Blanket bans on limited contractors advocated by Government

A considerable by-product of HMRC’s failure to educate UK industry is the widespread blanket approaches to status determinations and engagements adopted by hirers. The Lords report had raised serious concerns about the prominence of blanket ‘inside IR35’ determinations, made by hirers to negate tax risk.

In response, Government reiterated its assertion that all end-clients must take reasonable care when conducting status assessments, adding: ‘HMRC will consider whether there is any additional support that can be offered to ensure organisations approach status assessments correctly.’

“The same promise was made to appease MPs ahead of the recent vote,” notes Chaplin. “The problem is it is completely ambiguous and doesn’t really promise anything. Blanket assessments are a serious problem for which HMRC must take responsibility.”

Other organisations have decided to impose outright blanket bans on the engagement of limited company contractors. Such circumstances have seen many contractors forced into Pay As You Earn (PAYE) engagements, arrangements that are frequently compounded for contractors by the unlawful deduction of the hirer’s employment taxes from their rate.

The latter issue was ignored in Government’s response, though it supported the decision by companies to rid themselves of tax risk and compliance obligations through this means, stating: ‘organisations are free to decide how to structure their workforces and how to engage workers.’

Employment rights concerns go unheeded

A measure that could feasibly restore some parity for individuals forced into effective ‘zero-rights employment’ by hirers is the alignment of employment status for employment rights and tax purposes. This was proposed in Government’s 2017 Taylor review of modern working practices and advocated by the Finance Bill Sub-Committee following its inquiry.

However, Government’s response to the suggestion that IR35 reform should wait until a fairer regime is conceived was largely dismissive and failed to acknowledge the inherent injustice in the current system:

‘It is clear that careful deliberation is essential before considering any future reforms. However, the unfairness of contractors paying less tax than employees when their engagement meets the test of an employment relationship is a long-standing problem that the Government cannot delay addressing any further.’

“Government has had three years to act upon these recommendations,” notes Chaplin. “The decision to press ahead with legislation that intensifies the issues that the Taylor review sought to address goes to show that this Government does not have the interests of the self-employed at heart.”

Government promises research in wake of Off-Payroll decision

Other calls for Government to pause plans for a private sector rollout centred on the lack of sufficient research into the behavioural and economic impact of the legislation. The Lords report recommends that any private sector changes be preceded by a comprehensive independent review of the impact on both the public sector and the labour market.

In response, HMRC and the Treasury referenced the Government-commissioned 2017 IFF Research report ‘Off-Payroll Reform in the Public Sector’, adding: ‘Independent researchers found that there was no significant disruption to the sector or its use of contingent labour as a result of the off-payroll reforms.’

This response will likely draw the ire of many within the contract sector, with the report’s perceived lack of impartiality already having proven a key point of contention during the Lords inquiry. The report drew starkly contrasting conclusions to the multitude of other studies conducted following the public sector reform, having failed to consult with contractors of agencies, and was later found to have been potentially doctored, following a Freedom of Information (FOI) request from ContractorCalculator.

Curiously, Government went on to promise further independent research into the long-term effects of the public sector reform, which it intends to make available before April 2021, a decision that intrigues Chaplin:

“For Government to publish research at a stage where it is too late to act upon any of its findings is baffling. Any truly independent research will highlight the fundamental issues that can only be rectified by addressing the Off-Payroll legislation itself. Staying true to form, HMRC has opted to take a rather backwards approach.”

Published: 16 July 2020

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