House of Lords members appeared less than satisfied as representatives from HMRC and the Treasury provided unconvincing evidence during yesterday’s Finance Bill Sub-Committee hearing.
In an eventful session, the Government’s tax and financial authorities were accused by Lords of using the Off-Payroll Tax to deliver their interpretation of “rough justice”, an approach which they observed forces genuinely self-employed into false employment.
HMRC and Treasury representatives failed consistently throughout the afternoon to provide convincing responses to the issues posed to them, which included the widespread misclassification of contractors, HMRC’s unrealistic compliance cost forecasts, and unsubstantiated estimates of IR35 non-compliance.
And whereas Government ignored industry appeals in announcing the measures as part of the Budget 2020 last week, the clear consensus amongst the committee was that a postponement is required at the very least.
Off-Payroll postponement urged in light of coronavirus
Predictably, the coronavirus was the focus of much discussion, with the Lords eager to understand HMRC’s reaction to the predicament that ‘deemed employees’ have been placed into. Lord Forsyth described the familiar scenario involving a contractor forced into a pay cut of 25%, having been made to work via an umbrella company that has sourced employer’s National Insurance Contributions (NICs) from the contract rate, highlighting that their ability to generate revenue could be severely depleted further by the coronavirus.
Summarising the impact on affected contingent workers, Lord Forsyth commented: “The result is that the person doing the work is finding that their income is substantially reduced, and this is at a time in the economy where income is already going to be substantially reduced due to coronavirus. Perfectly honest people will have that cost deducted from their revenue. That is the point.”
When asked what is being done by the Government to compensate for this, Lindsey Whyte, personal tax, welfare and pensions director at the Treasury, was unable to offer anything of relevance. Meanwhile, HMRC Off-Payroll reform programme director Cerys MacDonald answered questions as to whether HMRC had considered deferring the measure in light of the coronavirus epidemic by insisting it is a policy matter for ministers.
Support for the other end of the supply chain was found to be similarly lacking. Lord Bridges questioned how the burden was being eased on the likes of GlaxoSmithKline (GSK), “a company in the frontline in the fight against coronavirus”, and the subject of a recent IR35 probe by HMRC. MacDonald responded by reiterating that large firms had access to an HMRC compliance helpline.
Off-Payroll accused of ‘destroying commercial relationships’
The imposition of blanket bans on the engagement of limited company contractors has been a common response to the Off-Payroll Tax from hiring organisations seeking to circumvent their compliance requirements and risk. When questioned on the issue, and the consequent impact on contractors being forced into umbrella and Pay As You Earn (PAYE) arrangements, MacDonald acknowledged that such arrangements were “commercial decisions” made by the hiring firms in question.
“It might be a commercial decision, but it’s as a result of the change that you’ve made,” responded Lord Forsyth. “You’re imposing a change that results in contractors’ commercial relationship being destroyed.”
Addressing the issue of blanket status assessments, MacDonald commented: “The legislation is very clear that this practice is unlawful, and we do expect businesses to take reasonable care in those individual assessments.”
In asking how HMRC intends to remedy the tax take in such instances, Lord Forsyth took aim at the Off-Payroll legislation’s flimsy ‘client-led status disagreement process’, adding: “How will you do that if the company, as a matter of policy, has decided they’re not going to deal with that?”
HMRC’s non-compliance estimate questioned by Lords
MacDonald’s response prompted Baroness Kramer to accuse HMRC of failing to take responsibility for the unintended consequences of its policy, before drilling into HMRC’s estimate that only 10% of contractors who should be operating ‘inside IR35’ are doing so.
MacDonald claimed that the figure derived from a survey of HMRC’s self-assessment system yet wouldn’t promise to provide the “hard analysis” used to determine the figure when prompted by Baroness Kramer.
“When you say non-compliance, are you talking about non-compliance with HMRC’s judgement, or with the kind of judgment the court would deliver?” Kramer added, referencing the “wide divergence” between the two interpretations, which has resulted in HMRC only outright winning three of the last 17 IR35 cases to make it to tribunal.
MacDonald disagreed with the suggestion that HMRC’s interpretation differed significantly from the courts’, suggesting that the taxman’s poor tribunal track record was the result of the most complex cases reaching the courts.
Off-Payroll cost estimates cause further bewilderment
Indications from the afternoon’s discussion suggested that HMRC is using the Off-Payroll Tax to pass on the burden for enforcing a legislation that it has historically failed to administer, the cost implications of which have also been a source of contention.
Concerning the administrative burden, HMRC projected a one-off cost of £14.4m for all UK businesses, a sum which when divided between the estimated 80,000 companies tasked with applying the legislation works out at roughly £180 per entity. MacDonald acknowledged the need for the taxman to revisit the estimate, yet once again could not promise to provide the calculations used to arrive at the figure.
HMRC representatives were also drawn on estimates that the long-term cost to the taxman of applying the legislation would amount to roughly £21m over five years, which representatives observed is to cover the department’s IT costs and the funding of a new Off-Payroll support team.
This figure was scrutinised against HMRC’s estimated annual ongoing cost to business of £5.3m, with Lord Tyrie posing the question: “So all of these businesses are now putting in £25m compared with £21m just for you. Do you think that’s a plausible comparison?”
Whereas HMRC’s representatives couldn’t provide a substantial response, evidence provided later in the afternoon suggested not. Providing evidence of NHS Digital’s Off-Payroll compliance efforts, chief financial officer Carl Vincent highlighted how the information centre spent an initial £150,000 on internal staff time to adjust to its compliance requirements, compounded by a further expense of roughly £460,000 over the next three years.
Reaction: Off-Payroll delay is essential for business
“The Lords clearly understood that the Off-Payroll Tax dishes out “rough justice”, as Lord Forsyth put it, by relying on the uncertainty encouraging firms to misclassify, thereby destroying perfectly good business relationships with contractors,” comments ContractorCalculator CEO Dave Chaplin. “These contractors then suffer hardship as a result of firms indirectly recovering secondary class 1 NICs from their contract rate.”
“As the committee appeared to fully appreciate, the self-employed are going to be vulnerable in times of unprecedented hardship caused by the coronavirus, as will the firms that rely on them. Now is not the time to tighten the screws further.”
Chaplin concludes: “The evidence provided, and HMRC and the Treasury’s inability to answer sufficiently the questions posed to them, clearly demonstrate the damaging unintended consequences of the legislation. Under the shadow of yesterday’s announcements on COVID-19, it is clear that the Off-Payroll Tax should be deferred for at least six months, as recommended by the Lords.”