Off payroll working – evaluation and next steps from HMRC
On Friday 18th May HMRC published their long-awaited consultation on the IR35 or ‘off-payroll’ reforms that came into effect in April 2017 in the public sector. Mel Stride, Financial Secretary to the Treasury commenting on the consultation said: “we’re consulting carefully and welcome a wide range of opinions and evidence on how to tackle non-compliance.”
The consultation was published alongside independent research, no doubt designed to deflect criticism that the government will roll out the reforms to the private sector regardless of how difficult implementation has been so far. The research was in my opinion, too narrow in scope as it appears only to have been commissioned to look at:
- The ease of classification PSCs as caught by the new rules
- The impact on the public sector and PSCs of the new legislation
There is no mention at all of the administrative issues that the new rules cause for payroll, finance and HR professionals, namely:
- How to capture the personal data from a contractor to create a payroll record. Payroll software is geared to handling individuals, not companies
- How to work out what is the fee to be subject to tax and NI
- How to physically pay the contractor the VAT and expenses from the invoice via the finance team and the net ‘salary’ via the payroll system
- The impact on HMRC systems of not being able to distinguish deemed workers from employees so all the automated processes incorrectly kick in – issuing of tax codes and student loan notices
- How to record the reduced turnover in the PSC’s accounts given tax and NI has been withheld so the invoice has not been paid in full
In the introduction to the consultation, HMRC say (although it’s not clear how they can estimate this accurately) that the loss to the exchequer of individuals working through PSCs, so Class 1 NI not being paid by the PSC or the public sector body (PSB), is projected to be £700m for 2017/18. This is in addition to the £440m they said was at stake for 2016/17 in the public sector – so over £1bn.
I think the major confusion for the private sector will be who is caught by this legislation and why. Compared to the private sector, the employers who will be affected by any roll out will vary enormously in size, with many more small and micro employers than in the public sector who may well use the services of a payroll agent. The agent will have no input to status decisions unless they are engaged to do so and that is not at all what the scope of an outsourced payroll service is designed to do. The agent will process tax and NI for the individuals he is told about, without huge efforts around comms and compliance activity there will be total ignorance of these changes and a belief from small employers that ‘they don’t affect my business’.
Both the research and the consultation talk about the reforms not affecting the ‘genuinely self-employed’. So, what does that mean? There will be PSCs who are not caught by these changes if they are providing a product, rather than their labour, but why don’t the reforms extend to the sole trader (the business structures one assumes HMRC means when it refers to the genuinely self-employed). Anyone who is offering their own skilled labour for a particular engagement should be a deemed worker. The choice of how to pay taxes for other engagements: PSC, sole trader or partnership should be irrelevant. There is in my view an absolute need to make it clear that regardless of the business structure you use, each engagement needs to be assessed by the hirer to determine if the contractual terms mean it is to be taxed via PAYE or can be considered as self-employment.
The success of the reforms in the public sector have been assessed by HMRC as such:
‘there are an estimated 58,000 extra individuals who are paying income tax and NICs undertaking work for a public authority above expected levels’, on what basis can these numbers be related just to the reforms? I’m not aware that PSBs submit expected head counts and equally HMRC admit to 200,000 duplicate employment records being created each year! The same can be said of the additional tax receipts. Given that HMRC’s payment system ETMP is still unstable and routinely incorrectly records tax and NI receipts can this be relied on as a benchmark?
The consultation indicates that HMRC have worked very closely with stakeholders, saying:
‘HMRC continues to monitor how the reform is working, providing technical advice where necessary to public authorities applying the rules’. It’s not been my experience that they have provided technical advice, as emails are never answered by the policy teams charged with bringing in the reforms so if they aren’t able to engage who is providing all this technical advice?
So, whilst it seems that we will see an extension to the private sector, to be fair there other options floated in the consultation around supply chain management and record keeping. My view of these are that the former is not relevant to the smaller employer in the private sector who does not have an extended supply chain – they will tend to have a direct relationship with a contractor, unlike the public sector and the larger private sector organisations, so this approach won’t deliver the hoped for outcomes and the record keeping would be a burden again on the smaller employer as the larger employer is likely to have more records anyway as part of their more sophisticated procurement processes.
Let’s hope in the next stage of this project we can take them at their word…”The government is committed to learning from the experience of the public sector implementation. We will take account of the needs of businesses and individuals who would implement any change and are keen to hear from those who would be affected”. There was no consultation on the operational impact of this when it was rolled out in the public sector despite much feedback being given to policy makers. There are a number of questions in this consultation on operational considerations and I hope to feed into that. Let’s hope second time around they do listen to those of us who have to make this work.