Treasury’s Lucy Frazer sticks close to HMRC’s script in IR35 exchange with peers

Lucy Frazer largely regurgitated HMRC’s ‘fictional’ IR33 submission to the House of Lords off-payroll follow-up inquiry when she gave her own evidence to it yesterday.

In fact, the financial secretary to the Treasury often either cited the discredited public sector IR35 research on the April 2017 rules -- to answer the peers’ queries about the April 2021 rules, or just explained it was too early to comment on the eight months’ old framework.

But in a potential sign that riling IR35 experts even more is not the new minister’s aim, Ms Frazer avoided the “too early” phrase which, alongside repeatedly citing the public research, HMRC used five times in its written evidence.

'So recent'

Instead, she said HMRC’s private sector data “isn’t complete;” or that HMRC is “analysing at the moment” the effects of the off-payroll reforms, which she described as “so recent.”

The former lawyer seemed less concerned about repetition in choosing her words about the public sector research, as she cited it about half a dozen times to answer the peers’ queries.

But despite the Lords’ queries being on April 2021’s rules in the private sector, the research Ms Frazer oft-answered them with was based on 51 education sites in the public sector, carried out in late 2020.

'No significant change; no widespread blanketing either'

“We know having looked at the 2017 reforms….that there wasn’t a significant change in labour market supply,” began the minister in one of the instances, citing the HMRC-commissioned research.

“So we know that the independent research found that there was no significant disruption to the [education] sector, or its use of contingent labour as a result of the off-payroll reforms.”

Asked by Finance Bill Sub-Committee chair Lord Bridges whether HMT believes the 2021 reforms are hurting labour market flexibility, she declined to even say that they “might” be.

The new minister later toed the line taken by the previous financial secretary to the Treasury Jesse Norman, saying blanket decisions against PSCs simply aren’t being taken often.

“Our view is that there isn’t widespread blanket assessment, and widespread blanket assessment isn’t supported by the analysis we have done,” she told the Lords, again referring to the research at public sector education sites.

'Tremendous lack of understanding'

Helpfully, Ms Frazer clarified that by ‘blanketing’ she meant where an engager deemed all PSCs inside IR35, not where an engager bans PSCs (a separate “legitimate decision,” she claimed).

Nonetheless, two contractors who tweeted the new minister directly last night don’t appear to think she displayed much of a grasp on what’s going on ‘on the ground.’

“[Her] lack of understanding of the issue was tremendous,” one finance sector worker wrote, referring to blanketing.

“Every bank I know have blanketed [or] banned…contractors, [and banks] alone [probably represent] more than 20% of the UK market.”

'Incorrect assertions'

Another Twitter user echoed after yesterday’s 4.15pm session: “All telecoms companies [I know of] pushed all contractors under IR35…[so] the end client does not [face the risk of having to] cover the tax. HM Treasury and Lucy Fazer MP are [therefore] incorrect in their assertions.”

Other statements by Ms Frazer which contractors will likely struggle to correspond with their working environments, intentions, and locations since April 2021, concern “brain drain.”

“If that was happening, then it would be a concern,” she said of contractors leaving independent work, quitting all forms of work, retiring, and emigrating.

“But we don’t know with any certainty if it [brain drain] is happening. Or the level of that it’s happening and where it’s happening”.

'We don't accept you can game CEST'

Another of her statements to the peers likely to raise contractors' eyebrows relates to CEST.

“I don’t think we would accept that you can [manipulate the tool],” said Ms Fraser, asked by Lord Bridges about how the HMRC tool can be ‘gamed.’

She added to the committee: “You will take your own evidence, but if people are answering the questions we’ve set accurately and appropriately, they ought to get the determination that the tool provides.”

'A little rushed'

The minister’s other head-turning submission may vindicate contractors and advisers who endured the April 2017 IR35 revisions to public sector contracting.

Upon questioning how HMRC could have concluded that applying 2017’s IR35 rules did not pose any “systematic challenges” to engagers, even though CEST errors have since cost government departments more than £135million in HMRC payments owing to wrong IR35 status assessments, she conceded that the public sector framework was, “a little rushed.”

“There were improvements we needed to make, and HMRC have made a significant number of improvements,” Ms Frazer said.“[But] I’m sure like all systems, more improvements can be made.”

'The 20% undetermined can have telephone support'

On CEST, and totally at odds with an earlier submission by the FSB last week which described the tool as “complicated”, she said: “If we wanted it to determine 100% of cases, we would have to make it [CEST] quite complicated.

“So HMRC has made a decision that in order for it to be easy to use; not expensive and not to take up too much of people’s time, that it’s going to deal with 80% [of cases], not 100%.

“And then… the 20% [undetermined] can have some telephone support [from HMRC] in order to come to their determination.”

'CEST isn't the only determiner'

Potentially more helpfully for contractors -- given many don’t trust HMRC’s IR35 helpline services, Ms Frazer’s fellow witness Pete Downing of HMRC indirectly addressed evidence given by the FCSA.

“HMRC is not treating CEST as the only determiner of off-payroll status,”  submitted Mr Downing, the department’s deputy director of employment status and intermediaries.

Sounding aware the FCSA submitted that the tool was implied to be a “legal requirement” in HMRC’s first round of off-payroll compliance letters, Mr Downing continued: “We’ve never sought to exclude other tools [on] the market.

“If that’s how people wish to take advice on this particular tax matter. It’s relatively normal in the tax sphere for our advice to sit alongside advice from other people.”

'IR35 reform doesn't affect genuine contractors'

Less positively for PSCs, the government restated its age-old position that the April IR35 reforms of 2021 do not affect the genuinely self-employed.

In fact, overlooking the fact that many engagers now refuse to take on any self-employed workers due to IR35 liability sitting with them as engagers, if they get their workers’ IR35 status wrong, another expert witness for HMRC told the peers:

“Individuals are still able to provide their services through personal service companies. So they are able to provide the skills they have to the labour market. Those who are genuinely self-employed will not be impacted by these reforms,” said the witness, HMT’s director of personal tax Suzy Kantor.

Still, some 2,700 calls a month have been placed to HMRC’s off-payroll helpline, 98% were answered, and the average answering time was 45 seconds, Mr Downing submitted.

'Eighty per cent satisfied with IR35 helpline'

He added that 80% of these callers (between March 2020 and November 2021) were ‘satisfied’ but sounding potentially unsatisfied, Baroness Kramer calculated that HMRC’s off-payroll helpline team of just 21 call-handlers could face up to 70 callers a day if every CEST user with an ‘undetermined’ result phoned in.

Other notable numbers include 8,000; the number of PSCs “still off-payroll” in the public sector; 50,000; the number of PSCs who joined a payroll since the April 2017 rules and £250million for 2017-2018 and £275million for 2018-19; how much was raised from those PSCs in additional tax revenue.

“The numbers get relevant”, said the Liberal Democrats’ Baroness Kramer, a former vice president of Citibank.

The fourth expert witness yesterday, Carol Bristow, director of individuals policy at HMRC obliged: “Our estimate is that of the total number of personal service companies, we expect 180,000 to be properly engagements we’d characterise as employment, leaving 60,000 properly as self-employed engagements.”

'Level of friction, cost and risk'

“It’s a slightly more complex picture, is it not?” the Lib Dem peer came back in. “Legally, perhaps even under tax law, many people could continue to act as personal service companies.

“But there is now a level of friction, and cost, and risk, embedded in making that decision – which didn’t exist before [the April 2021 framework.]”

The most relevant answer to this question came from Ms Fraser, but it actually came earlier in the session when the new minister again just regurgitated HMRC’s written evidence -- and this time almost to the letter.

“I don’t dispute that some people have changed their working practices – they may very well have done that,” she said.

Issuing the same huge understatement in its evidence, HMRC wrote: “The government recognises that a consequence of the reform might be for organisations and contractors to reconsider how they work together, and that some contractors may change the way they provide services.”

Kate Cottrell, an IR35 specialist told ContractorUK: "All the witnesses yesterday, however experienced at HMT or HMRC, made a good attempt at providing nothing but regurgitated, scripted answers that we have heard far too many times now."

'Treasury-initiated transitional challenges'

Towards the end of the session, Labour peer Lord Chandos seemed to suggest it was all a mess of the government’s own making, but indicated the government sounds like it wants nothing to do with it.

He said: “A Treasury-initiated action has caused these ‘transitional challenges’ -- whether it’s for engagers or contractors. So I think [you] just saying, well we wash our…”

“I didn’t say that,” interrupted an irritated-sounding Ms Fraser, seeing the Labour peer raise his hands up in the air and to the sides. “I said I’d be very happy to look at it.”

The minister seemed to go off-HMRC-script another time -- early on in the session, when she took a long stumble on her “view” of how private sector IR35 reform has been implemented, saying: “People are now moving into the tax system we think is appropriate for them. And so er, from that perspective, er, it’s er, it has gone, er, it has gone, er, I’m…fairly well.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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