The move, which was signalled at the Autumn Budget, will consider ways to increase compliance in the private sector, with HMRC saying that its estimates suggest only 10% of individuals working as contractors via personal service companies (PSCs) are applying the rules correctly. The extension to the private sector will be problematic as has already been shown by a number of IR35 cases at the First Tier Tribunal where HMRC's claims have been overturned.

Options under consideration include applying the same employment intermediary legislation as was introduced for the public sector in April 2017, although no final decision has yet been made on this. The consultation will also evaluate the rules for engagement in the public sector.

HMRC states: ‘However, the fundamental principles of the off-payroll working rules – that the employment status test determines who should be taxed as employees – are not being considered as part of this consultation. Similarly, this consultation will not consider wider reforms of the taxation of employees, the self-employed, or those who work through an intermediary.’

Under the new rules from April 2017 for public sector engagements, public authorities are now responsible for determining whether the worker would have been regarded for income tax and NICs purposes as employees if they were engaged directly. The public authority or agency (the ‘feepayer’), that pays the PSC, is also responsible for accounting for and paying income tax and NICs under PAYE to HMRC, on behalf of the worker.

The first part of the consultation looks at how effective this approach has been. HMRC has analysed PAYE data covering the first 10 months of the reform, from April 2017 to February 2018, which show that in any given month there are an estimated 58,000 extra individuals who are paying income tax and NICs undertaking work for a public authority above expected levels.

HMRC estimates that an additional £410m of income tax and NICs has been remitted from these engagements, and argues that taking into account the corresponding impacts on corporation and dividend tax receipts, the reform is on course to increase overall Exchequer revenues by at least the level estimated at Spring Budget 2017.

HMRC also says the numbers of interventions required to reach the same number of PSCs are now significantly reduced, as it can open a single enquiry covering multiple off-payroll workers engaged by a particular client, greatly improving the efficiency of the compliance process.

Grant Thornton tax director Mike Herdman said: ‘There was nothing in the consultation that surprised me. The overriding message is that the government is going to bring in something for the private sector, but genuinely wants to avoid some of problems the public sector faced when it was introduced.’

Research

To address concerns about the potential impact of the reforms on UK labour market flexibility, and the administrative burdens on clients and agencies, HMRC has commissioned independent research from IFF Research and Frontier Economics.

This consisted of a quantitative survey of 117 central bodies, 15 (covering 4,095 sites) and 100 individual sites in the public sector, all of which had recent engagement with off-payroll workers. There were qualitative followup interviews with 30 respondents whose responses indicated they had been affected by the reform.

The findings suggest almost all public authorities surveyed are now confident that they are complying with the reform (97% of central bodies and 90% of sites surveyed were confident they were complying with the reform by August 2017). Half of public authorities report they found the public sector reform easy to comply with (central bodies: 49%, sites: 57%).

However, a considerable proportion of public authorities did experience early difficulties in complying with the reform, largely related to gaining familiarisation with HMRC’s check employment status for tax (CEST) service and resolving disputes with workers and agencies.

The vast majority of public authorities were reported to be making assessments on a case-by-case basis (91% of central bodies and 87% of sites).   The research did find that some public authorities have found it harder to fill off-payroll vacancies since the reform was introduced (32% of central bodies and 22% of sites), while some reported off-payroll worker rates had increased since April 2017 (28% of central bodies and 20% of sites). However, this was found in areas where skills were already known to be scarce.

Most (58%) of central bodies and 70% of sites reported no change in the ability to fill vacancies while 63% of central bodies and 78% of sites experienced no change to contractor rates. The research also found that some public authorities have experienced ongoing administrative costs in order to continue to comply with the reform. However, some public authorities felt that these costs would decrease over time and many had experienced no additional costs beyond the initial set-up costs.

As regards the CEST service, designed to give a clear answer as to whether a user is employed or self-employed, HMRC said its analysis shows this happens in 85% of cases. For the remainder, HMRC provides detailed guidance and the specialist employment status helpline. The CEST service has been used over 750,000 times. HMRC’s latest figures show that it gives a self-employed outcome around 60% of the time, and employed around 40% (based on February 2018 data).

Private sector reforms

The consultation makes clear that extension of similar reform to the private sector is the lead option, although it welcomes view on whether the design of the reform and the implementation process could be improved. For example, HMRC has found that some agencies have disregarded the public authority’s determination about the worker’s employment status and chosen not to operate PAYE.

HMRC says a key concern is that current enquiry and enforcement processes are typically costly and drawn-out, and even when successful do not result in the full amount of tax being recovered. 

As well as refining and extending the April 2017 rules, the consultation does outline alternatives, such as encouraging or requiring businesses to show they have carried out prescribed checks in order to help ensure that off-payroll workers provided to them through their labour supply chains are complying with the rules.

In addition, clients could be required to ask the PSC to provide a completed CEST determination and to check the outcome against the working practices of the individual carrying out the role in question. The requirement could be underpinned by some form of penalty, or by denying the client a deduction for the costs of using labour from a supply chain that they have not checked.

Alternatively, the checks could be optional, but clients who have not performed them and are later found to have used a non-compliant labour supply chain could be named publicly, meaning that those using unsecured labour supply chains would be running a reputational risk.

A time consuming aspect of the current compliance process is the need for HMRC to gather a range of information from the various parties in the labour supply chain, often several months or sometimes years after the work has been performed and payment has been made. This issue could be addressed by requiring clients to gather and retain information for off-payroll engagements, such as contracts, shift rotas, and line management reporting requirements. This would allow HMRC to quickly gather such information directly from the client should they later open an enquiry into one or more PSCs.

Some options have been ruled out of scope for consideration. They include the idea of a minimum length of engagement so that workers in contracts for short periods, say less than one month, would not need to consider the off-payroll working rules for that contract; a new structure of the ‘freelancer limited company’; or a flat withholding tax similar to the construction industry scheme.

The consultation will also not consider proposals that off-payroll working rules could be replaced entirely with a requirement on the client to make a decision on whether a given test or set of criteria, applies to the worker. If the test applies then the client would then be liable to account for employer NICs on the fee they pay to the PSC and pay that over to HMRC. HMRC says that with this regime, the PSC would not be subject to PAYE or employee NICs, and so would still enjoy a tax advantage, even if they worked in the same way as an employee.

The consultation will close on 10 August 2018.

Open consultation Off-payroll working in the private sector

Report by Pat Sweet