Time to get a MOOve on with this IR35 debate…
If you’re a public-sector payroll professional, you may feel this article is not for you as you’re already admirably (and quietly as befits the public sector) getting on with the ramifications of the April 2017 off-payroll changes. However, you’ll no doubt have invested a lot of time and may have been on the receiving end of some colourful contractor feedback, using the CEST tool. The fitness for purpose of CEST is at the heart of the debate about the success of the public-sector rollout and the almost, it seems, inevitable rollout to the private sector which maybe as soon as April 2019. If CEST does need to change then public-sector payroll professionals may feel that (again) they need to put all their existing contracts through any new iteration as well as familiarise themselves with the changes.
The main bone of contention is the fact that mutuality of obligation (MOO) is not one of the current CEST questions. HMRC maintain (see its position paper issued last week) that it is not required, as mutuality is assumed in all relationships where money changes hands in exchange for goods or labour. The contractor side argues that there is a specific MOO, that if absent the courts consistently agree that the contract is one of self-employment and outside IR35/off-payroll. They point to the fact that most freelance contracts with PSCs entitle the hirer to terminate the contract without notice – indicating no ongoing mutuality to be offered work and accept it.
So, to summarise where we are at the start of July…
- We have an employment status tool that HMRC encourages the public sector to use as the mainstay of its status compliance defence, even though it does not deal with the important area of mutuality of obligation between the two parties. That said HMRC stands by the tool and the results it delivers, although in 15% of cases so far it gives no decision. This leaves the PSB either to risk penalties and interest down the line or take the risk averse position of applying IR35
- I have seen a very mixed response to the off-payroll rules within my client base, some PSBs have been very thorough in the use of CEST and the design of new payroll and accounting processes, others appear not to have done anything as organisations of similar size and structure have identified no off-payroll workers. I have also seen examples of job roles deemed as caught by IR35 when even the title indicates this is unlikely e.g painter and decorator
- There are reports that some parts of the public sector have insisted everyone is put on an employment contract and so have incurred even higher costs than simply employer’s NI and apprenticeship levy (total of 14.3%), as pensions, holiday and statutory payments will now be due. This blanket approach is not in line with the legislation that requires an objective consideration each contract, although it could be defended where identical roles are involved
- It is impossible for HMRC to distinguish off-payroll workers from actual employees once they are added to the FPS for PAYE/NI withholding, leading to inappropriate tax codes and student loan notices being issued and HMRC telling contractors that they are employees when they clearly are not. This had led to disputes between the PSB and contractors
- We have no clarity as to how the net fees paid to the PSC are to be recorded in their accounts, given the gross turnover must be recorded to reconcile the VAT position. HMRC’s view that the net turnover is recorded is widely disputed
Whether Ministers will listen to the concerns about the rollout in the public sector or will simply be seduced by the amount of employer’s national insurance and levy that a private sector extension will bring in to the Treasury coffers remains to be seen, but let’s hope that whichever way this goes we get the following and quickly:
- A swift decision on the future after the consultation closes on 10 August – it can’t be left until the Budget pre-Christmas unless any implementation is April 2020 with a commitment to sort out the public-sector issues in the interim
- An acknowledgment of the payroll issues of extending off-payroll, they rarely get any airplay (they were not even in the scope of the independent research that HMRC published with the IR35 consultation). These include significant process and system redesign in payroll, HR and finance systems and the inclusion of a deemed worker marker in the FPS
- Clear and accurate guidance on how the PSC accounts for the net fees, as both the PSCs themselves will have their accounts completed by agents and those same agents will also be responsible for running the payrolls of the hirer of the PSC – in my experience private sector agents are totally unaware of the off-payroll rules
If the Government wants to achieve the Treasury inflows it needs, then ample time, responding to stakeholder feedback, and providing clear guidance and a CEST tool that inspires confidence are all vital.