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Off-Payroll failures highlighted again at Lords inquiry

The failings of the Off-Payroll legislation and its impacts on contractors and business were addressed during the latest House of Lords Finance Bill Sub-Committee hearing yesterday.

Amongst the fundamental issues flagged up were non-compliant blanket assessments of contractors and the failure of HMRC’s Check Employment Status for Tax (CEST) tool to deliver accurate outcomes in practice.

Consistent with recent consultation feedback, experts were also vocal about the need for a more holistic alternative to the Off-Payroll legislation, while warning of the threat of burdensome compliance requirements, which Temple Tax Chambers barrister Keith Gordon warned is “fitting business into a strait jacket”.

IR35 complexity key to compliance concerns

Several experts highlighted the complexity of the underlying case law and the problem with imposing the responsibility of conducting status determinations on contractor clients. Office of Tax Simplification (OTS) tax director Bill Dodwell argued that a new employment status test should be introduced to provide clarity, while Gordon used two recent tribunal cases to illustrate the current problem:

“Last week Eamonn Holmes was reported to have lost a case whereas a year ago Lorraine Kelly won hers. Superficially, the facts of either engagement are almost identical. The whole exercise is fraught with such difficulty that one ought to go back to the drawing board altogether.”

Caroline Colliston of the Law Society of Scotland (LSS) summarised the problem with attempting to apply HMRC guidance to their own scenario: “HMRC guidance is an ever-evolving piece which remains in draft format. However helpful, this guidance won’t definitely cover every example that businesses will face.”

Given his background, Dodwell was asked a number of times how much simplicity the Off-Payroll legislation provides on a scale of one to 10. Though Dodwell was notably reluctant to answer, his silence itself could be viewed as a damning indictment of the impending legislation.

CEST rejected by industry experts

The subtle nuances involved in employment status case law and the failure of CEST to grasp these were partly responsible for unanimous rejection of the tool. Speaking on CEST, Colliston highlighted a key practical problem:

“The answer to a single question can change the result from outside to inside. Looking at the difference between the answers that one can provide, I’m not sure that many businesses would fully understand what the difference between two certain answers are.”

Practicality was also an issue for Karen Thomson of the Administrative Burdens Advisory Board (ABAB), who noted that procurement managers and HR personnel often asked to complete a CEST assessment often won’t be able to accurately answer questions.

Meanwhile, Gordon alluded once more to the Kelly ruling. Though regarded by the tribunal judge not to be a borderline case, an assessment of CEST when given the facts of the Kelly judgment returns an ‘inside IR35’ outcome.

Off-Payroll ‘fitting business in a strait jacket’

The general consensus amongst stakeholders was that the Off-Payroll legislation imposes overly complex burdens upon engagers. To the contract sector, and indeed to HMRC, this concern is nothing new. When asked whether the taxman had responded sufficiently to concerns about the Off-Payroll legislation, Gordon responded with an analogy:

“Business isn’t ready for 6 April. It’s like a stretch of road where the speed limit is 30mph. The authorities consider that some people are going above 30mph. If you have such a concern, my view is that you invest in monitoring the speed rather than applying a system whereby everyone driving along that stretch of road has to prove that they were doing so below 30mph.”

Gordon added: “The Revenue is not allowing business to conduct itself in a commercial sense. It’s actually fitting business into a strait jacket. The Revenue’s statistics when it comes to tribunal cases aren’t brilliant, so how do we even know they are right when they express concern about compliance to date?”

HMRC’s judgement concerning the one-off administrative cost of applying the legislation was also called into question. During the previous hearing, one expert had commented that the taxman’s estimate left each entity responsible for Off-Payroll compliance with £180.

Dodwell cast further questions over HMRC’s estimation, acknowledging that the standard cost model adopted by HMRC in determining the cost to business is dated, adding: “There’s a general feeling that it is not capable of producing a decent estimate of what private costs are for adopting new measures.”

Unlawful Off-Payroll blanket assessments ‘inevitable’

Experts tended to advocate a more holistic approach to taxation of the self-employed, acknowledging the inconsistencies in treating an individual as employed for tax purposes without the provision of employment rights.

Though HMRC has stressed that the alignment of tax and employment rights is outside the scope of the Off-Payroll proposals, non-compliance with the legislation certainly isn’t. Whereas Thomson acknowledged that client concerns about incorrect assessments make the blanket assessment of contractors more likely, Dodwell ominously conceded: “Having some form of blanket assessment is fairly inevitable”.

While a blanket assessment would impose an excessive tax burden on a legitimately self-employed contractor, experts suggested it could also expose those affected to further risk. Gordon commented that he had little confidence that HMRC would stand by its promise not to retrospectively target the tax affairs of contractors deemed within scope of the Off-Payroll legislation.

The potential silver lining for contractors might the report resulting from the inquiry, which indications suggest will not be favourable towards the Off-Payroll legislation. Comments from and questions posed by committee members throughout the hearing drilled into HMRC’s motive for the private sector rollout, with Lord Forsyth of Drumlean concluding:

“Again, and again, we see that the consultation is actually about telling people what’s planned, and the implementation is done on far too short a period. One has the impression that it’s about getting as much money as quickly as possible.”

Published: Monday, 2 March 2020

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