Have the ‘off-payroll’ working reforms worked?
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
5 August 2022
Following the Public Accounts Committee’s June 2022 report and more evidence-giving in the House of Lords, Justine Riccomini explores how off-payroll reform is holding up
The Public Accounts Committee (PAC) report published on 25 May 2022 makes interesting reading for anyone involved in off-payroll working. The underlying question being asked is: is the instability of the off-payroll working regime as it currently stands, with all the uncertainty and unintended consequences it brings, proportionate to the additional revenue raised?
Taking several key observations and recommendations of the report, in turn, we learn that:
Off-payroll implementation issues
The PAC noted that there were high levels of non-compliance in central government, which could only reflect poor implementation by HMRC and other government bodies. The recommendation was that HMRC should produce sound statistics illustrating the key areas of public sector non-compliance to allow for the development of solutions to curb these instances. Two “quick wins” in the form of improvement of existing guidance and tools were suggested.
The PAC also wished to be provided with a further update in six months’ time on how the private sector reforms are being implemented in six months’ time.
The ‘offsetting’ problem – double taxation for some?
The report also provides situations in which individuals have been taxed twice, or not at all, and instances of the wrong party becoming liable for the tax.
The Employment Status & Intermediaries Forum (formerly the IR35 Forum) members raised this issue in 2018 as a widespread problem facing engagers and contracts and highlighted its inherent unfairness, suggesting that a ‘Demibourne’ style solution could be utilised by HMRC to ensure the right person paid the right tax at the right time. The group considered that: Notifying the PSC/worker that a refund of tax may be due (as HMRC currently propose) results in the wrong party benefiting from the arrangement and thus creates an unjust result, as follows:
(a) The business/agency bears the full PAYE/NIC.
(b) Both PSC and worker ultimately receive tax-free earnings regardless of whether reasonable care was taken in issuing the SDS.
(c) Once this perverse effect becomes known in the sector, it could potentially trigger claims from workers/PSCs that they have been mis-categorised as outside OPW to trigger a tax windfall in their favour.
(d) By notifying the PSC/worker, the group opined that HMRC would effectively be breaching the fee-payer’s confidentiality – however, HMRC disagreed with this point.
In the summer of 2021, after gaining very little ground, the non-HMRC Forum members wrote to the Financial Secretary to the Treasury, Rt. Hon. Lucy Frazer QC MP, to ask her to intervene and push for a resolution. Currently, the Forum is working with HMRC policy to find a practical and fair workaround which gives a similar outcome to ‘Demibourne’ protocols and hopefully a resolution will be reached in the autumn or winter of 2022/23.
Structural problems
In spite of the taxation of intermediaries concept which is set out in Chapter 8 of ITEPA 2003 having been introduced over 22 years ago, various additions were made to it in the process such as the Managed Service Companies legislation in Chapter 9 of ITEPA and the Off-Payroll reforms set out at Chapter 10 of ITEPA, the PAC found that there are still ongoing structural issues in terms of how the legislative provisions translate into practical operation.
The PAC considered that HMRC should be making more effort to review how the legislation is working in practice and identify efficiencies. They observed that particular emphasis could be placed on obtaining the right kind of data which might assist them in quickly identifying non-compliance cases and eradicate cases where the same income is being taxed twice or that the wrong person is paying the tax (i.e., the offsetting problem mentioned above).
CEST Tool
The PAC highlighted the ongoing problem that the widely criticised CEST Tool has not been able to produce a determination in a large number of cases.
Challenging status determinations
The report concludes that it is too difficult for workers to challenge incorrect status determinations, which places them at a significant disadvantage in the process. They recommended that HMRC must facilitate an expedited and independent dispute resolution process – something which HMRC stepped away from when these reforms were introduced, saying that any disputes were a matter for the contractor and engager to resolve. They also recommended that HMRC should understand the level of appeals currently in progress and whether these are working as they should be.
Disproportionate effect on different sectors
The PAC expressed no confidence that HMRC has performed any exercises to understand whether any sector has been disproportionately affected by the reforms, and the reasons for any adverse outcomes. They recommended that HMRC should ‘proactively identify and work with sectors that have been particularly affected to understand the challenges, establish how to address them and make it easier to comply’.
The PAC requested that HMRC should report back on this in 6 months’ time.
Impact assessment
The PAC requested that HMRC should work up a comprehensive cost-benefit analysis which it should present to Parliament, setting out the costs of compliance to HMRC itself as this has not been done there is no information on what the actual cost has been to implement the reforms.
Wider impact of the reforms
The report noted that HMRC has not carried out enough work to fully understand the wider impact of the reforms introduced on workers/contractors, employment opportunities and labour markets, and whether the legislative provisions are being applied in practice as per the original intentions of the measures. The PAC recommended that HMRC conduct and publish its research into this.
Private sector impact distorted by Brexit and Covid
Finally, the PAC perceive that Brexit and Covid have played a significant part in distorting the impact of off-payroll working reform and the costs associated with its implementation to the public and private sectors, as well as to HMRC itself.
So, will anyone ever get to the bottom of the proportionality point? In July 2022, BEIS published its response to the 2018 employment status consultation. Disappointingly, even though four years has elapsed, the report announced that no changes will be made to the current methods of assessing employment status, and things will remain as they are for both tax and employment law purposes. BEIS published some guidance to accompany the response which consolidates most of the older guidance, but in essence nothing has changed.
Clearly, there is still a long way to go before we have a system which is working in practice whilst raising the right amount of revenue from the right people at the right time.
