The Chartered Institute of Taxation (CIOT) is suggesting an alternative to HMRC’s extension of the public sector ‘off-payroll’ working rules to the private sector. The Institute believes this will avoid repeating mistakes with last year’s rollout in the public sector, while enabling HMRC to curb non-compliance with IR35 tax rules by some people who set up and work through their own personal service companies (PSCs).1
The CIOT has made the suggestions in its response to an HMRC consultation seeking views on the best way to tackle non-compliance with the off-payroll working rules (IR35) in the private sector.”2
CIOT said its anecdotal evidence shows the public sector rules are causing lots of difficulties in practice and that many public sector bodies are automatically applying the IR35 rules3 to contractors working through their own PSCs without assessing rigorously whether or not those rules should be applied on a person by person and contract by contract basis. This situation is made worse by doubts about the accuracy of HMRC’s Check Employment Status for Tax (CEST) tool which it recently transpired has not been formally assessed under the Government Digital Services standards, which exist to 'check whether a service is good enough for public use'.
HMRC’s own consultation document indicates that their CEST tool only gives a clear answer 85 per cent of the time - which leaves 15 per cent of users without a clear answer on their employment status. The CIOT’s view is that there are likely to be many other cases where a ‘false positive’ has resulted because organisations have, for understandable reasons, taken a very conservative approach and taxed PSCs themselves.
The Institute argues that the public sector changes, introduced in April 2017, have not completed a full compliance cycle yet, so it is too early for HMRC to assume they were successful and extend them.
John Cullinane, CIOT Tax Policy Director, said:
“The ultimate aim must be to align the tax treatment of all off-payroll engagements, whether in the public sector or the private sector, but this does not automatically mean that the right answer is simply to roll out these relatively new public sector rules to the private sector.”
The CIOT suggests an alternative approach whereby businesses e-file a report of payments made to PSCs, and their view of whether the PSC should be applying IR35, to HMRC on a regular basis. By also expanding existing questions on PSCs on workers’ tax returns this would enable HMRC to follow-up directly with the PSC to check up on whether the PSC has applied IR35 to an engagement.
The CIOT also said that where a PSC deliberately fails to apply IR35 a significantly increased penalty for non-compliance could be applied. This would signal HMRC’s resolve in enforcing IR35 and lead to better compliance.
Furthermore, under the CIOT’s plan, the worker could be made jointly liable for the PAYE/NIC that has not been accounted for. Increased penalties and the transfer of debt would concentrate the individual’s mind much more on ensuring that due attention is paid to IR35, said the CIOT.
John Cullinane said:
“Our alternative approach could prove a much less administratively burdensome and more cost-effective approach to tackling non-compliance than adopting the public sector rules.
“Extending the public sector approach to the private sector is likely to tie up HMRC and tax tribunal time and resources as a result of an appreciable number of PSCs challenging engager decisions to apply PAYE deductions to a contract by arguing that such decisions were based on far too much caution.
“Instead of the planned extension, we suggest that retaining the existing IR35 rules but significantly increasing the penalties for non-compliance, and making the worker jointly liable for PAYE/NICs debts, and ensuring HMRC has all the information needed to tackle those that ignore the IR35 rules, will mean that individuals will be rather more focused on paying the right amount of tax, at much less cost in time and resources for HMRC.”
Notes for editors:
1. CIOT’s submission on 'off payroll' working can be found here.
2. HMRC’s consultation document can be found here.
3. In 2000, the Government introduced the off-payroll working rules known as IR35. These rules ensure that people working through a personal service company (PSC) who would have been employees if they had been engaged directly, pay broadly the same income tax and National Insurance contributions (NICs) as if they were employed. But HMRC estimated that only 10 per cent of individuals working in this way apply the rules properly costing the Exchequer hundreds of millions of pounds in lost tax revenues every year. In April 2017, the Government reformed these rules for engagements in the public sector. In the Autumn Budget 2017, the Government announced it would consult on how to tackle non-compliance with the off-payroll working rules in the private sector.
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk
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