“There are some high level points to do with the principle of the extension in the way proposed, and there are some practical and legal points”, says Adrian Marlowe, the trade associations’ Chairman.
On the high level points, ARC is concerned that the Chapter 10 public sector rules were never scrutinised by the Treasury Select Committee, despite concerns expressed in 2017 by the Committee itself that there should be a hearing and review in 2017. Also it is concerned about the reliance on the online assessment tool CEST, even though it is not mentioned in the legislation itself. ARC points to the fact that it is provided under HMRC’s name with the implication that it should be correct and reliable, yet all the evidence is that it fails to meet that criteria in many respects. Also, the claim that the proposed extension will not be a new tax “simply doesn’t pass muster” he said. “It is new, will force payments of companies onto payroll, taxes hirers and agencies in ways not before considered in the private sector and departs significantly from the original IR35 rules. Additionally the abandonment of the 5% top slice tax relief, which contractors working for small companies will retain under the original IR35 rules, means that new rules will apply to 100% of income for a new class of contractor, those working for larger hirers. As a new tax its imposition would appear to contravene the Conservative Party Manifesto at the last election.”
“The claim by HMRC that the rules are to enforce the original IR35 rules from 2000 is wide of the mark. The original IR35 rules did not require a decision by a hirer or before the work starts. Those rules required the assessment to be based on the arrangements and contracts used throughout the assignment, but the new proposed rules totally conflict with that principle. In doing so the rules conflict with established case law around both actual employment status and tax related employment status.”
On the commercial side ARC points to the risk of liability that arises from the uncertainty of any status assessment. “Realistically the contingent liability for unpaid levels of PAYE and NICs may exist for up to 6 years and should be reflected in the hirer’s accounts. This in turn affects capital values. In addition, the suggestion that those higher in a contractor supply chain may be liable for the non-compliance of those lower in the chain simply adds to risk and liability.”
On the practical side ARC argues two further points. First, the requirement that every hirer should decide whether the status rules apply or do not apply and then inform the party it is dealing with of that decision makes no sense. ARC proposes that the default should be that the rules do apply, with no requirement for any decision to be passed down in any other case. “This would significantly cut the administration for everyone involved, particularly hirers” says Marlowe. “The hirer would not have to make any decision save for where the rules may not apply, and everyone knows exactly where they stand.”
Second, the suggested right for the contractor to appeal against a decision of a hirer cannot work. The hirer may well not even know who the contractor will be at the time it decides the job is caught. Even if it does, a hirer will not welcome complaint in circumstances that an appeal is only likely to be raised where the decision is that the tax rules apply. No one will appeal the opposite. Many hirers will not accept the need to set up an appeal process. A further consequence may be a significant increase in claims to employment Tribunals.
Rather than pointing to unintended consequences as requested in the consultation, ARC suggest that it is an intended consequence that use of contractors will simply be ruled out by risk averse hirers.
In conclusion Marlowe commented; “It is understandable why HMRC wants to address the issue of IR35 tax avoidance by self-employed contractors, but we believe methods proposed will cause many problems. It appears to be HMRC’s desire to force payments onto payroll, so bringing the apprenticeship levy into play. It is this element that is determining contractor tax. Without this, there are alternative methods that could work far better without the disruption that we believe the proposal will engender”.
ARC also addresses the removal of small business from scope. Its full response can be seen here.