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Better data sharing with HMRC could solve off payroll rules problems

Inadequacies and incorrect taxation under the public sector off payroll rules could be avoided when applied to the private sector by better data sharing with HMRC, according to The Chartered Institute of Taxation (CIOT).

The off payroll working rules known as IR35 had run since 2000, to 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. HMRC had estimated that only 10% 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 the rules for engagements in the public sector and 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.

The CIOT suggests that 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.

It adds 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.

It would also be the case that 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.

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 rules 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. It said the 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% of the time - which leaves 15% of users without a clear answer on their employment status. The CIOT says 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, Tax Policy Director at CIOT 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.

“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,” said Cullinane.

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