OTS response to proposed IR35 reform in public sector
Whilst we await the next step following the end of the consultation process of reforming IR35 within the public sector, the Office of Tax Simplification (OTS) have published their response to the Government’s consultation document, Off-payroll working in the Public Sector:Reform of the Intermediaries Legislation.
Like many critics of these proposals, the OTS are not convinced that they will simplify matters but rather add complexity by:
- the need to request information to help determine status, giving rise to more administrative burden;
- the status test results may not be binding, and so lack certainty; and
- possible boundary issues and market distortions between private and public sector.
The use of a digital online employment status tool is something that the OTS have previously advocated but they warn that:
- such a tool will only deliver simplification if there are clear rules and procedures that will help produce certainty of the outcome;
- two versions of the tool should be tested to cater for differing situations/businesses; and
- the tool will need to be kept up to date
Public sector bodies
So that everyone is clear which departments should be operating the proposed rules, there should be a clear and understood list of all those public bodies affected, with an obligation to ensure that their contractors understand their position.
Again, there is a further warning that imposing these reforms will create unfair differentials between private and public sector organisations, making it more difficult for the public sector to hire specialist help and creating a distortion in the market.
Information for decision making
Rules will need to be introduced so that engagers who have taken reasonable steps to obtain the information can transfer the liability to the business that failed to provide the information. These could be similar to rules contained within s.14 Agency Workers Regulations 2010.
5% allowance
From a pure simplification point of view, the OTS say the 5% deemed payment allowance should be scrapped where a contractor falls inside of IR35 as it adds complexity for the engager. Instead, the PSC should claim the allowance separately.
VAT
If a contractor is to be treated as an employee, then there should be no VAT implications. Making a PSC account for VAT when their director is being forced onto the payroll smacks of HMRC having their cake and eating it.
Tests and online tool
The first two parts of the test before progressing to the online status indicator do not give certainty as the decision is not binding. Even if, on day one, there were that certainty, it may not apply if there is a material change to the contract, which the engager and/or the contractor may not be aware of.
Materials
Where 20% or more of the contract is for materials consumed in the services then it falls automatically outside of IR35 but the majority of freelancers will not pass this test as their services are knowledge based. HMRC know that this is a fait accompli.
Personal service and control
Where the 20% test is failed the engager then moves on to the two questions that concern personal service and control and if a positive answer is given to these then IR35 applies. Being unable to answer ‘yes’ to both questions then requires use of the online status tool.
The OTS sees the three-part test as an unnecessary and burdensome complication. Furthermore, the sole use of the personal service and control tests to determine a contractor’s status is not appropriate when dealing with professional and highly skilled freelancers and has been condemned as poor practice.
Someone who is an expert, experienced or highly skilled, may have problems substituting because it is specifically their skills that are required but this is not necessarily an indication of employment. There may also be security issues, particularly pertinent in the public sector, that make substitution prohibitive, in which case this would not necessarily point towards employment.
The control test is not always a clear indicator where skilled workers are concerned and would be more appropriate for unskilled or lower skilled labour.
Unless the coding for the new tool is based on employment status case law, then it is likely to be perceived as unfair and biased in HMRC’s favour.
Penalties for non-compliance
Whilst the OTS believe that any tax rules should be supported with penalties and interest, the results need to be fair and simple. It therefore follows that the rules should have clear and simple procedures to enable an engager to be sure that they have operated them properly and not at risk of penalties.
What a mess, all the good public sector interims will migrate to the private sector leaving public sector decimated in terms of talent they can attract and retain.
All this nonsense is slowly pushing me out of business. My anxiety levels about running my business are so high I feel I can’t take contracts anymore. I think a far simpler approach is to require that businesses where directors are the entire company must not take more than around 25% (random number inserted here) of their income as dividends (the rest must be salary). This allows investment in the business (you don’t have to take anything out if you don’t want to), ensures HMRC gets its bit of Income Tax and NI (much as we may hate the idea of Employers NI) and it’s VERY VERY SIMPLE and FAIR!!
its fine run with it in the meantime and look for another way to make a living and walk away when it suits you not them
@Keith
No need to enforce a limit on the % taken our as dividends because – they already introduced a dividend tax.
Due to the dividend tax, taxation between contractors and permies is now already fair. So there is not even any point in introducing these rules any more – all it will do is prevent contractors from keeping money in their businesses – so no chance of investing and growing the business.
Why the focus on public sector?
If my company does the same work for public sector as for private, and charge the same amount why a different tax treatment?
Agree with Will. Although I don’t regard the dividend tax as ‘fair’ – just another tax grab by a government incapable of controlling its spending; PAYE and NI rates are themselves too high – it certainly closes the gap between a ‘PSC’ and employee in terms of extracted remuneration. So no further stupid rules are required.
I am a contractor with a Limited company working via an agency for a large multinational. I pay myself a going rate salary based on my hourly rate so pay PAYE & employer and employee NI. The £3000 employer NI break this year this will go into my dividend pot. Any back pay related to holiday bonuses and pay rate rises also goes to my dividend pot. I have a little bit of operating expenses related to day to day running of the company so that helps to offset CT. Do I need to be greedier now there is a £5000 tax free dividend allowance? Not really.
I am sick of this IR35 debate that has been going on for years. It was brought about by greed and the promise to the very highly paid high profile individuals being guided by dodgy accountants that they will pay “less tax” by going under the radar on salaries and hence pay themselves enormous dividends. Unless they never declared their dividends, then the only “saving” will have been on non-payment of NI, which no doubt would have been offset by taking them into the highest tax tier anyway. Given that these people are so highly paid they do not care about the state pension I guess having no NI contributions does not concern them.
My company accepted a 2 day contract which turned out to be within the CIS scheme (another HMRC scheme). It paid £256 + VAT. Because we were not CIS registered the agency took 30%. Because the contractor we were using fell inside IR35 I had a legal duty to process 95% of the income as PAYE. Even with the extra money gained through the VAT flat rate scheme, after deducting tax & NI there was a shortfall of £67.84. When I asked HMRC what I should not pay the employee; paye tax & NI; or VAT they had no answer. The schemes are totally incompatible with each other. Yes, HMRC do want their cake and eat it.
They just keep on piling crap on top of crap. I’ve been contracting 20 years. Almost all of that time I’ve been under attack from the Government of the time; through retarded laws at one end and wage compression at the other through the deliberate importing of hundreds of thousands of Indians. I will never vote red, blue or yellow again; they all represent corporations, certainly not me.
HMRC are disintegrating. They are a joke in a first world country.
All the above are symptomatic of vested interests and stupid dishonest politicians.
We even had a nice 7.5% tax increase to pay for all the people getting a thousand pounds a month handout in tax credits (including hundreds of thousands of foreigners).
I’ve now had enough. This mess could continue for a while yet before it all collapses. I am selling my house, downsizing and will be structuring my affairs to pay no tax at all. I envisage working a couple of months a year, claiming tax credits and paying zero tax.
I will be much happier. The Government can then do what they want with their ridiculous laws and they can import even more foreigners to pay my tax credits.
I would have continued working for another ten years at least but it’s simply not worth the hassle anymore.
Need to request info is an admin headache, but what happens when that info is wrong?
Or when it changes over time – need to constantly monitor/re-assess.
If someone gives the wrong info, or it’s interpreted wrongly it may be a nightmare establishing who pays any tax/NI due.
Unworkable, as ever.
Well said, Tony.
“I am sick of this IR35 debate that has been going on for years. It was brought about by greed “
Certainly, by the government’s. They couldn’t limit its scope to the very narrow range of “abuse” it was meant to counter. Too busy licking at the chops.
[quote name=”Soprano”]Well said, Tony.
“I am sick of this IR35 debate that has been going on for years. It was brought about by greed “
Certainly, by the government’s. They couldn’t limit its scope to the very narrow range of “abuse” it was meant to counter. Too busy licking at the chops.[/quote]
Has anyone ever met the mythical ‘leave friday as employee, return monday as consultant’ worker that the original legislation claimed to be targeting ??
In 25 yrs as a contractor I never have.
OTOH I have encountered several “permietractors” (who are fair game for IR35 – if disguised employment was a two way relationship) .
This ‘public sector IR35’ istuff is just admittance of the true irony : the state is the biggest perpetrator of disguised employment in the UK.
You really should ask yourselves why the hatred from the government and why all the spiteful tax regulation against individuals trying to make a living. WHO is really driving this vendetta and in a country like Brittan and is a vendetta really that legal. if anyone in the city was being pursued like this there would be a great howling about the unfairness. Again, this smacks of the government wanting everything its own way the want flexibility of contractor but the ability to tax them like employees without giving employment rights .this should have gone through the courts many years ago