Private and confidential

By email to: offpayrollworking.intheprivatesector

consultation@hmrc.gsi.gov.uk

23 July 2018

Dear Sir/Madam,

Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 18 May 2018. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee is provided on the previous page.

We note that this consultation covers a number of challenging matters and asks 34 different questions (5 of which include calls for evidence). We do not believe that sufficient time has been allowed for providing a comprehensive response.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area. We wish to comment on some specific aspects of this consultation and related matters.

Modern working practices review

The employment law and tax rules which establish employment status are complex and clearly in need of modernisation. The UK is currently undergoing a consultation process examining a number of aspects of modern working practices, including employment status, in response to the Taylor Review1.

In addition, a number of recent high profile cases in the area of employment/worker status have shown this issue to be in a state of flux. The recent Supreme Court decision (judgment date 13 June 2018) in Pimlico Plumbers Ltd2 is particularly worthy of mention. A number of other potentially significant cases in respect of the ‘gig economy’ are also due to be heard by the UK Supreme Court in 2018.

Whilst mindful of the consultation deadline, it is clear from this consultation, recent case law and the overall evolution of modern working practices that there are much broader issues to be considered which overlap and interact with one another – the overall landscape remains fluid. Accordingly there are obvious implications for employment law, human resources and other contractual obligations which we are not best positioned to comment on because they are not solely tax issues.

The need for certainty

At the heart of any changes made should be a drive to provide certainty and clarity to all stakeholders whilst allowing the system to be flexible enough to reflect changing working practices in the UK and further afield.

This is particularly important in the context of the UK’s planned departure from the EU as businesses and taxpayers continue to deal with a high level of uncertainty over the future economic security of the UK and the shape of any post-Brexit trading arrangements.

Later in this submission, we set out that modern day work practices are largely a reflection of commercial factors such as the need for flexibility for businesses and their owners rather than tax or national insurance avoidance schemes.

Commercial realities and the impact on the UK labour market

One outcome3 from the 2008 recession has been a move in the UK labour market from traditional employment in “permanent and pensionable” full-time jobs towards contracting, part-time, temporary positions and self-employment. Many UK and Northern Ireland businesses are still fragile after the recession and the UK’s impending exit from the EU creates further economic uncertainty.

Some businesses are also naturally seasonal with peaks and troughs in trading patterns meaning they may be understaffed when busy but unable to afford the entire employee compliment during less busy periods. Many employers do not want to have to repeat letting employees go, with all the financial and worker morale costs to their organisation that inevitably accompany lay-offs.

Suggestions that private sector contract positions are created by businesses solely to avoid national insurance obligations and provide scope for the contractor to take advantage of the tax system through an intermediary structure are often unfounded.

The reasons for incorporation

In addition, the suggestion that companies are set up for tax avoidance reasons does not appear to take account of the set up and ongoing annual costs associated with running a company and other relevant factors such as limited liability protection.

HMRC’s Research Report 317 Reasons behind incorporation4 found the main reason (in 24% of cases) for incorporating was the protection provided by limited liability, with tax reasons coming next. The main concerns with incorporation were around increased administration or paperwork, and additional costs (e.g. accountant fees). Having incorporated, according to the report, the main benefit of incorporation was the reputation or credibility status that a formal corporate structure provides to a business (22%), followed by tax and NI savings (20%).

The report concluded “It is important to view these findings in the context of the survey findings as whole, which show that tax and NI savings are part of a range of motivations and benefits of incorporation, and is not the most common motivator or benefit.”

Given the widespread disparity of reasons why businesses incorporate it would be useful if more up to date and wide spread research was conducted which could then be used to explore incorporation in the context of the use of intermediary structures.

As set out earlier, companies are often established for commercial factors such as limited liability. The cost of running a business through a company often outweighs any perceived tax and national insurance savings. Any thorough review of potential changes to the intermediaries legislation for the private sector should therefore recognise this.

Compliant businesses in the UK are generally not interested in damaging their reputation or incurring the punitive penalties that come with HMRC enquiries for the sake of tax and national insurance savings.

However, where a business is IR35 compliant, it should be pointed out that this does come at a cost to the deemed employee. Whilst IR35 effectively taxes them as such they do not enjoy the same employment rights as a full employee of the contracting organisation.

Enforcement activity

The underlying principle of the IR35 legislation is clear and unequivocal: where an individual is working in the same way as an employee, the result of the legislation is that overall they pay broadly the same employment taxes as an employee.

It strikes us, therefore, that the difficulties cited in the consultation document which arise with some intermediary companies are solely as a result of enforcement issues rather than the legislation itself. The current consultation process (at Paras 3.14 to 3.15) does recognise this and notes a number of measures taken by HMRC to improve compliance in this area in recent years.

Given that many of these measures have only recently been introduced, it seems premature to suggest that they are not working and we would suggest a post implementation review of these measures is carried out before considering any further changes to the existing IR35 legislation for the private sector.

Some recently decided court cases on IR35 (such as the Jensal Software Ltd case5 ) were won by the taxpayers. This may suggest that perhaps non-compliance with IR35 is not the true issue but rather that HMRC may not be targeting its enforcement/compliance activity in the right direction.

In addition, HMRC could explore other existing areas of UK tax legislation where an intermediary structure may benefit from more favourable treatment as a way of closing the perceived “tax gap” further for such structures. For example, a more thorough review of the business expenses could be carried out to identify travel and other expenses not incurred in the course of the business.

The public sector experience

This consultation cites the April 2017 off-payroll working in the public sector rules as having been successful in both increasing tax compliance and resolving the compliance challenges faced by HMRC in enforcing the off-payroll working rules in the public sector. However these rules have been in operation just over a year.

In addition, the research referred to in the consultation took place between August and October 2017; just months after the legislation took effect and was very much in a bedding down period – it has not assessed the impact for the full PAYE cycle for 2017/18. In our opinion, it is difficult therefore, to draw any meaningful inferences from this research and we would recommend that it is carried out again now that the legislation is over a year old.

These outcomes therefore both reflect very early experiences only and, disappointingly, do not take into consideration the myriad of continuing challenges experienced by the public sector after the introduction of these rules.

In addition, the perceived early success of the public sector rules may simply be because many public sector bodies have taken the path of least resistance and operated the rules for all its contractors rather than take the risk of getting it wrong and facing penalties and underpayments for doing so.

Extending the April 2017 public sector off-payroll regime to the private sector would also not be guaranteed to provide a sustainable solution and would impose on the private sector the numerous practical problems and consequential compliance costs and burdens currently faced by the public sector.

An extension of the rules would necessitate a thorough review of new and existing contracting arrangements with changes required to payroll systems and the need to review budgets and forecasts to take into consideration the additional financial costs of arrangements caught by the rules.

This would not only be unwelcome in the private sector but would come at a time when the sector is faced with an even greater challenge in the form of Brexit.

Overall, the public sector rules have resulted in a lack of transparency for individuals and engaging bodies coupled with problems accounting for fees in personal service companies. Payroll packages often do not distinguish between true and deemed employees resulting in suppressions of items such as student loan notices and auto-enrolment processes. These problems must be addressed before the rules can truly be said to work in the context of the public sector.

Any proposals to change the law governing IR35 in the context of the private sector should therefore be put on hold and the enforcement of the current rules strengthened and reviewed as previously suggested.

Conclusion

We look forward to engaging in further consultation in future on this matter. In the meantime, in the context of the foregoing, as a minimum we believe that the following two key recommendations merit serious consideration:

1. Assess the outcome of recently introduced HMRC compliance/enforcement measures on compliance in the sector with a view to taking further more targeted compliance action where necessary; and
2. Do not extend the off-payroll working rules as they apply in the public sector to the private sector until a further assessment of the recent changes in the public sector can be undertaken; and

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours sincerely,

Alan Gourley, Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

1 Good — Work – The Taylor Review of Modern Working Practices, July 2017 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627671/good-work-taylor-review-modern-workingpractices-rg.pdf

2 Pimlico Plumbers Ltd and another v Smith [2018] UKSC 29, http://www.bailii.org/uk/cases/UKSC/2018/29.html

3 The UK Labour Market and the ‘‘great recession’’ – The London School of Economics and Political Science, March 2016 http://eprints.lse.ac.uk/65615

4 Ipsos MORI Social Research Institute, June 2014 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/342335/HMRC_Research_Report_317_-_Reasons_behind_incorporation.pdf

5 Jensal Software Limited v The Commissioners for Her Majesty’’s Revenue & Customs [2018] UKFTT 271 (TC)