What HMRC just told us about IR35 reform and why it's worrying
Last week, HMRC attended the Freelancer and Contractor Services Association (FCSA) members’ meeting in London, to discuss the forthcoming off-payroll legislation -- scheduled to take effect in just a little over 40 days’ time.
Here, exclusively for ContractorUK, I will summarise the key points on the legislation which our members raised and outline the responses from HMRC which, remarkably, said it will enforce it on April 6 with no ‘soft landing,’ writes FCSA chief executive Julia Kermode.
Rationale for the off-payroll reforms
HMRC gave their usual reasons for the reforms to the IR35 legislation including that the public sector reforms, in their view, have resulted in an increase in compliance. The apparent evidence for this is the increase in payroll taxes that were introduced after the April 2017 off-payroll reforms.
However, I did make the same point as I always do in reference to this; that more people were paid through payroll does not in itself indicate improved compliance. It just indicates that there are more people on payroll than previously and does not take into account whether they should actually be on payroll. Nor do the figures take into account corporation and dividend tax losses due to PSCs now being taxed via payroll or employment taxes reclaimed by people incorrectly being placed on payroll.
Timing of the off-payroll reforms
HMRC outlined their recently announced change to the timing of the reforms which will now be effective on a service provided after April 6 2020. Prior to this change, it had been planned to affect all payments made after April 6 2020, which would have meant that services provided in March 2020, or earlier depending on how quickly invoices had been issued and paid, would have been within scope.
While it is a positive and logical change, it has come rather late in the day given that many businesses in the sector have been planning for work done in March to be within scope. This therefore means that numerous contractors have had their engagements terminated or amended sooner than is actually necessary. Still, the change does at least show that someone is listing to our sector, albeit quite late in the day.
Reclaiming overpayment of taxes by contractors
Another key point raised at the meeting concerned what individuals need to do to get a refund of overpaid taxes. There is currently a process whereby anyone can inform HMRC that they have overpaid their employment taxes and therefore request a refund. However, the process is not clear, nor has it been well publicised to contractors.
HMRC did confirm that they will provide more information on how to seek a refund in the guidance documents they produce for contractors.
But even if an individual does succeed in their claim, this of course does not include Employer NICs, which may well have been effectively deducted from their gross rate. If the corresponding Employer NICs were to be refunded, this amount would presumably be paid to the client. This is likely to be in a different financial year meaning the contractor would need to seek the monies back directly from the client. Now, with many clients being very large businesses, I just cannot see how this would work in practice. Yet HMRC stated it would not be insurmountable. To paraphrase a colleague, ‘Mount Everest is not insurmountable, but are we all going to climb it?’
The CEST tool
Attendees went on to discuss HMRC’s Check Employment Status for Tax (CEST) tool, which has been much maligned by industry commentators. An enhanced version of CEST has been issued which, according to HMRC has been well-received (although I’m not sure the audience agreed).
The Revenue restated that CEST is the only tool that they will stand behind. There was a very clear caveat to this – ‘providing that the tool has been used accurately and as intended.’ That will be cold comfort for NHS Digital, which have had to accrue for £4.3m owed to HMRC due to their reliance on the CEST tool, which HMRC did not stand behind at all, and instead challenged NHS Digital’s status assessments.
From this we can only conclude one of two things; either NHS Digital deliberately used the CEST tool incorrectly, or they misunderstood some elements of the tool which led to inaccurate assessments. If the latter, then I sincerely hope that the enhanced tool is clearer so that misunderstandings are less likely. In any case, any businesses using the CEST tool should do so with care and perhaps some skepticism as to whether HMRC really will stand by the results.
Tax avoidance schemes
We discussed the tax avoidance schemes which are once again rife as they aggressively seek to profit from the off-payroll changes by luring unsuspecting contractors into not paying tax and NICs. I have ranted about these schemes many times before. In essence, they pay only a small proportion of contractors’ income via payroll, and the rest as something else, such as a loan, shares, annuities -- the possibilities seem to be endless. The individual that signs up to the scheme is personally liable for the debt of unpaid tax and NICs, and will ultimately receive a large tax bill. HMRC confirmed that they are aware of such schemes, and are concerned about the impact of them, so the department says it is taking firm action to shut them down. In the meantime, my advice to contractors is to ensure that 100% of their (inside IR35) income is paid via payroll.
Enforcement of the off-payroll reforms, not a soft landing
One of our accredited member firms quizzed HMRC over whether there would be a ‘soft-landing’ following the launch of the changes on April 6th 2020, i.e. ‘How aggressively will the legislation be enforced initially?’ A 'soft landing' of the sort enquired about would usually mean a penalty waiver or at least see hefty fines ruled out for businesses demonstrably trying their utmost to comply.
The member astutely pointed out that HMRC’s ‘education programme’ had been deferred for a couple of months due to the recent general election, meaning that many large businesses are not ready for the changes and will struggle to have everything in place in time. The Revenue’s response will disappoint the many businesses unprepared and the many wo have made reasoned calls for a soft landing (and those who want the ‘softest of soft landings’); because ‘there will be no soft landing’ whatsoever. And HMRC said it would be taking enforcement action as necessary.
Looking back now on our face-to-face with HMRC, while we had useful discussions with the tax authority, and its officials were genuinely listening, I’m afraid to say that I think that ultimately the off-payroll plans are too far along and will almost certainly be implemented on April 6th; sharp.
However, we do have an opportunity with the new chancellor, Rishi Sunak, in place. He is preparing Budget 2020 right now and I urge him to listen to the concerns of the contracting sector, and its partners, and consider the likely impact on the very businesses that the UK will rely on in the coming months as we navigate the implications of Brexit.