Last year, the chancellor’s attempt to increase National Insurance Contributions was met by a huge uproar from millions of self-employed people across the UK. He then turned his attention to cutting the tax allowance and has been considering potentially lowering the VAT threshold.
Now the government has set its sights on the self-employed again. Her Majesty’s Revenue and Customs (HMRC) recently launched a consultation on extending the controversial off-payroll tax rules to the private sector.
The off-payroll rule, more commonly known as IR35, was introduced in 2000 in a bid to tackle tax avoidance by people claiming to be self-employed when they were in fact employees.
In April 2017, HMRC shifted the responsibility for determining employment status from contractors to the client or hirer in the public sector, making them liable for any tax if they got it wrong. The reform has had a significant effect on not just the UK’s 4.8 million self-employed, but the public-sector bodies too.
And now the government is considering extending the reforms to the private sector and believes it is the ‘lead option’, despite evidence to suggest that the new rules have had a disastrous effect. This includes widespread walkouts, which in turn have exacerbated the NHS staffing crisis and resulted in major delays or cancellations in numerous government and public projects.
Research by IPSE and the Chartered Institute of Personnel and Development (CIPD) confirms how the tax law has had a seriously damaging effect on the NHS and across the public sector.
The study, based on a survey of 867 contractors and 115 hiring managers (84% of whom were from NHS trusts), found that 51 per cent of managers had lost skilled contractors as a direct result of the changes to IR35.
A further 71 per cent claimed they were now struggling to hold onto their contractors and 75 per cent said it is now also harder to recruit contractors.
So why have the changes been so disastrous? IR35 legislation is notoriously complex and as a result, many public-sector bodies have made blanket decisions, putting all contractors on-payroll, rather than assessing each case individually based on their engagements.
Andy Chamberlain, deputy director of policy at IPSE, said: “The figures confirm what we have been hearing, that the changes have not worked, despite HMRC’s claims. It says it has raised £410 million in Income Tax and National Insurance Contributions as a result, but we will need to wait until the January 2019 tax return for a full assessment.
“The government brought out the CEST tool in the wake of the changes, with the intention of helping clients and hirers assess employment status. However, the tool itself is flawed.”
The CEST tool (Check Employment Status for Tax) was launched in March 2017, only a month before the reforms came into effect and problems with the system were immediately visible.
According to Chamberlain, CEST oversimplifies complex legislation and is therefore unable to make an accurate assessment. For example, there is no test for mutuality of obligation, which is the obligation to provide your service on a recurrent basis for a client and is key to determining employment status.
CEST has also been heavily criticised in parliament and condemned by tax accountants, who have stated the tool is “not fit for purpose”.
A number of recent tribunals over IR35 have questioned HMRC’s interpretation of mutuality of obligation, suggesting that it should be considered in CEST. HMRC has also stated that the tool is unable to make a determination in 15 per cent of cases.
In addition, figures released recently revealed that 4.3 million phone calls to the tax watchdog have gone unanswered in the last year. And when calls were answered, taxpayers were left waiting for more than 10 minutes.
Chamberlain added: “The self-employed don’t have an army of consultants and experts to assist them with complex matters of tax, and they rely on HMRC to provide them with timely assistance.
“Time spent on the phone is time the self-employed and independent professionals aren’t earning money. And the problem is only going to get worse.
“The public sector is just a fraction of the size of the private sector. If the government goes ahead with extending the IR35 changes, it would have a devasting effect, not just on the self-employed sector, but businesses and the wider UK economy.
“Even HMRC with all its supposed expertise can’t seem to get it right, losing two of three cases in the tax tribunal just this year.”
A spokesperson from HMRC told Modern Work: “The Check Employment Status for Tax service (CEST) has been used over 750,000 times since it was introduced. It gives an answer in 85 per cent of cases, and where it does not generate an answer, customers are then able to call a dedicated helpline staffed by specialists who can give further advice.
“We plan to publish a paper in respect of mutuality of obligation. This has been prepared for members of the IR35 forum and we intend to publish it by the end of July, alongside the minutes of the June 2018 forum meeting.”