Public sector today – private sector tomorrow?
Public sector today – private sector tomorrow?
We should all now be well aware of HMRC’s attempts to restrict the use of PSCs in the public sector. Although first muted in the 2016 Budget, legislation is set to become law in April 2017. A major element of the legislation will be a new online tool to help determine IR35 status.
However, the real sting in the tail is the proposal that where a PSC contractor is paid ‘off payroll’, (i.e. without the deduction of tax and NI under PAYE), if subsequently it is determined that such payment(s) should have been ‘caught’ by IR35, then in the event of non-payment of the correct amount of tax, the entity making such a misclassified payment will ultimately be responsible for any shortfall in the amount of tax due – including employers NI. The effect of this will be that the decision on the application of IR35 will now rest with the engager and not with the PSC.
‘dry run’
Even though these proposals are stated to apply only to ‘public’ bodies engaging PSCs, many observers have commented that this fundamental change in how IR35 is applied, is merely a ‘dry run’ which, if successful, will subsequently be rolled out to cover all PSC engagements – both in the private sector as well as the public sector. If this is to be the case, the question remains – how and when?
To address these two vitally important questions, there are a number of critical hurdles that HMRC must first overcome:
1. Is it acceptable to ask one party in a contract to make a determination of the other party’s tax classification? IR35 determination is an imprecise science at best (as evidenced by the number of IR35 cases that HMRC have fought and lost to date) and is actually based on a number of wide ranging factors. Critically, it is not based purely on empirical data. Where subjectivity comes into play, what is considered ‘caught’ by one man, may be determined as ‘outside’ IR35 by another. HMRC have stated that it is their intention to issue new guidelines/online tools to help engagers determine IR35 status. But notably, previous attempts at this have proven that this is much more difficult to do in practice than they would like us to believe. Unless the regulations applicable to IR35 are fundamentally overhauled, IR35 status is governed by Tax law and subsequent case precedent, and not by a set of HMRC questionnaires. For a correct IR35 assessment to be made, not only must the relevant factors be considered pertaining to the contract in question, but also many other factors, most of which are unlikely to be known by the engager. To err on the side of caution will undoubtedly lead to ‘false employment’.
2. The temporary recruitment industry has been a major factor in the UK’s ability to bounce back from the recent recession so quickly and successfully. HMRC has conducted research into the acceptability of their proposal to pass ultimate responsibility for unpaid tax to the engager. Results (published in July 2016) suggest overwhelming disapproval from all sectors – including end users of contract labour as well as most intermediaries. In the face of such overwhelming adversity, how strong is the Government’s appetite to go ahead and introduce such unpopular regulations? But without Debt Transfer, these proposals will be as ineffective as current IR35 legislation.
3. A recent report published by the Office of Tax Simplification (an independent Government body tasked with giving independent advice to the government on simplifying the UK tax system) criticised the proposed legislation and sighted confusion and unfairness as part of their objections
4. In view of the Brexit result, will the Government have more on its plate than it can reasonably handle over the next few years without introducing poor legislation?
Therefore, HMRC and the Government have quite a challenge in front of them, if they are to:
a) make a success of introducing their proposals as they relate to the public sector; and
b) to roll these changes out to the private sector at large.
Best guess is probably that until such time as IR35 is scrapped and replaced by legislation that is clear, concise and much easier to enforce (based on empirical rather than subjective evidence), tinkering around at the edges will only lead to confusion and frustration for all.
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