What a time we live in! Brexit, the deficit, a generational lack of investment in training and devaluation of the pound, have combined to create a toxic formula, resulting in budget restrictions for many in both public and private sectors. We know our government has quite a task to address all, but it is not clear that lessons from the past have been learned.
Take IR35, for example. The personal service company (PSC) was born in 1989 when single member companies were first permitted. At that time, the principle of tax reliefs for companies, partnerships and self-employed had been essentially unchanged for many years. Individuals supplied through agencies largely had to be treated as PAYE workers by agencies, but companies didn’t.
By 1999, the advent of the internet had enabled the advantages of different tax models to be shared widely. As a result, many PSCs were being created and flexibility in the labour force was extended, but the Treasury was losing out. A new tax was needed.
Based on the ancient and complex precepts of employment status, the IR35 rules (introduced in 2000), and subsequent tests, have entered contracting folklore. ‘Direction, supervision and control’, ‘personal service’, ‘substitution’, and ‘mutuality of obligation’ were just some of the issues with which contractors, agencies and some hirers became familiar.
Everyone, including HMRC, knows that a determination of IR35 tax status depends upon the facts and actual arrangements; this is not the domain of lay people and even expert lawyers are hard pressed to advise with certainty. These complexities led to a ‘new industry’, whose sole purpose was to help individuals set up companies to avoid paying more tax than strictly necessary. The irony cannot have been lost on HMRC.
Sixteen years on, and the siren cry of ‘tax avoidance’ appears overwhelming. The IR35 rules plainly don’t work, and change is certainly needed but are other interests, policies and principles being overridden?
The government has had recommendations from various sources including from those representing the ‘new industry’, and my trade association ARC, which represents forward thinking agencies and consultancies. ARC argues for total modernisation, but this has apparently been rejected. Instead, the government’s solution, published in early December and proposed to be piloted in the public sector, is to create a set of rules, that achieves little benefit but has the potential to damage relationships and principles set in stone for decades – a dangerous, ‘sticking-plaster’ approach using brain scrambling, convoluted, ‘Twister-like’ language and style more appropriate to an earlier age.
Why should a third party be liable for the tax of a company? What happens to company invoices and liability? Why should anyone other than HMRC determine tax status, with decisions foisted on to public sector hirers? Why should individual PAYE rules apply to a service provided by a company? Why should the implication of tax liability affect the simple engagement for a job to be done? How can an online tool, which HMRC claims will help with assessment, ever be determinative?
The government seems to have fallen for the very trick that it should be avoiding. I maintain that our supply agency members and the vast majority of hirers are not interested in tax avoidance, only in making the placement. The government, however, is forcing everyone to be interested. We say that it should be taken out of the equation. It is surely between HMRC and the contractor. Is the government dancing to someone else’s tune?
Under the new rules, the hirer has to make a choice, does IR35 apply yes or no. A ‘no’ decision results in the hirer being exposed to potential tax liability and employer NICs if HMRC disagrees, an extremely unpalatable position. Even if the online tool supports the decision, HMRC can argue that the information given was not complete and accurate, so prudent hirers are likely to oppose this choice on principle.
A ‘yes’ decision means accepting a higher cost, namely employer NICs and possibly the cost of the apprenticeship levy, at a time when budgets are at breaking point. In addition, relationships with contractors who believe they should be paid gross are likely to break down. Agencies informed of the choice, as is required, will inevitably get caught in the crossfire, and will have their own liability position to consider and costs to pass on. Conflict at every turn.
There is a simple alternative. The tests should be simplified and the default changed so all IR35 applies to all PSC contractors whether direct or supplied by an agency, unless the contractor can prove otherwise. Payments on account could address cash flow requirements as in the construction sector. No convoluted legislation, no necessary online tool, no damage to principles or blurring of lines, minimum cost.
There is an easier way forward, by learning from the past. Let’s all, hirers, agencies and contractors work together to persuade the government to properly grasp the nettle for everyone’s benefit.
Adrian Marlowe – Chairman of the Association of Recruitment Consultancies (ARC)
Further education and other hirers interested in working with ARC should email [email protected] or call 01273 777997.