IR35 roundtable on the private sector
By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)
16 August 2018
Justine Riccomini hosted a roundtable meeting at ICAS with HMRC to discuss IR35 in the private sector. Here she explains key aspects of the discussion.
Background
On 18 May 2018, HMRC issued a consultation on Off-Payroll working in the private sector. The consultation closed on 10 August and ICAS submitted its response after I had attended a series of meetings over the summer to discuss the main issues with HMRC and other tax professionals.
I was very pleased to be able to host a roundtable meeting at CA House with HMRC on 25 July. Various members from the ICAS Owner Managed Business Committee and Employment Taxes Working Group attended.
Essentially, the consultation offers three options for consideration:
- Should the regime which has been brought in for the public sector be replicated in the private sector? or
- Should private sector businesses be required to ensure that intermediaries are complying with IR35? or
- Is additional record-keeping by the engager the answer?
ICAS did not respond to each and every one of the 34 questions in the consultation document, but instead, set out some general initial thoughts and then responded to a number of questions where it was thought ICAS member experience and knowledge as it relates to policy formulation would be most relevant.
The meeting
The consultation terms of reference were very tightly drawn. This meant attendees to the roundtable meetings were asked not to bring discussions on employment status generally into the conversation. This was extremely difficult to do! Many in the profession consider that employment status as a concept overarches this debate.
While ever there is a conflict between employment legislation, where there are three statuses (employed, ‘worker’ and self-employed), and tax legislation, where there are two statuses (employed and self-employed), there will always be confusion and disputes.
However, some useful discussion was had at the roundtable meetings as to how a new approach to IR35 in the private sector might work.
CEST and MOO
The meeting began with a general discussion around the Check Employment Status for Tax (CEST) tool and Mutuality of Obligation (MOO) principle.
HMRC considers that it is not necessary to establish that MOO exists because all contracts (both of service and for services) contain MOO.
The IR35 Forum (a regular meeting between HMRC and professional bodies, the minutes for which are available online) professional bodies’ representatives generally disagree with this stance because MOO was originally conceived in the employment tribunal in the 1941 Chadwick case, to determine if a continuous employment existed in a particular scenario concerning employment rights, and therefore cannot include contracts for services.
In the 1984 Nethermere case, MOO was expanded upon further, when the concept of the “irreducible minimum" ('...of obligation on each side to create a contract of service' (Stephenson LJ)) was introduced.
This was meant to add clarity in cases where MOO would be used as a last resort test to determine whether a bare minimum for a contract of employment existed. So, without MOO, there cannot be a contract of employment.
Since then, the 1999 House of Lords case of Carmichael set a precedent when it was decided that a cluster of 'zero-hours' contracts with the same engager could be treated as one overarching contract.
In terms of IR35 contracts, however, it is clear that some sort of contract already exists, so it may not be necessary to consider MOO.
As the IR35 legislation is not meant to determine employment status but merely examine a “hypothetical contract” (to determine whether the contract would, but for the existence of the intermediary, have been one of service or for services and thereafter, whether it is caught by IR35), then in my opinion, MOO is rendered null and void.
However, by assuming that MOO is already present, I believe HMRC is discarding the requirement for a CEST decision to be made as it is effectively stating that an employment relationship is already present.
Other aspects
The main concerns of the attendees at the ICAS roundtable were:
- There were many problems with the introduction of the new IR35 regime into the public sector, and to introduce a new regime into the private sector before the public sector regime has had time to bed in and all the unintended consequences, is not sensible.
- The CEST tool is too inflexible and is not producing the correct result in many cases, and it requires substantial changes to be made to it so that it helps rather than hinders the decision-making process.
- The cost to the public sector in NICs is substantial and this must be acknowledged by HMRC. The cost to the private sector could cripple some businesses that already have extremely tight margins. The Government needs to be careful that innovation, growth and productivity do not suffer as a result, and that the labour market can remain flexible to support UK business.
- The public sector has had difficulty recruiting and retaining service suppliers despite HMRC insisting this is not an issue.
- The private sector works in a completely different way to the public sector. It is faster-paced, more agile and decisions need to be made quickly which will affect the recruitment and contracting process.
- There is a conflict between IR35 legislation and company and insolvency legislation; these should be supporting the Intermediaries legislation.
One possible solution put forward was that it may be sensible to introduce a tax withholding in the same way as is currently operating in the Construction Industry Scheme. That way, engagers would not suffer financially by having to pay employer’s NICs, and the intermediary could offset the withholdings against their final tax liability.
Conclusion
ICAS supports the need for HMRC to collect the right amount of tax at the right time from the right people and understands that IR35 has not been a successful regime since its introduction 18 years ago in 2000.
Nevertheless, with Brexit looming, the private sector may not need another cost and admin burden on its employers at this time and the next steps must be thought out carefully.
There are no easy answers and, ideally, a combination of the three options could be configured to lessen the burden on employers – in particular, in terms of cost. The timing and methodology of the introduction of any new regime needs to be taken gradually, and not rushed in, to avoid having a negative impact on business stability and growth.
Until a clear picture emerges on both the public sector repercussions and the employment status consultation it would not be sensible to introduce a new regime into the private sector.