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5 Reasons to Stop The Off-Payroll Tax Now

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With just days to go before the Off-Payroll in the private sector consultation closes, Dave Chaplin, CEO and founder of ContractorCalculator and director of the Stop The Off-Payroll Tax Campaign today spelled out his five top reasons why the Off-Payroll Tax should be abandoned:

Damage to the UK economy and flexible workforce

Since the legislation took effect in the public sector in 2017, the damage has been well-documented.  In the NHS for example, poor implementation of the legislation has wrongly taken away self-employed status from tens of thousands of doctors and nurses, many of whom provide temporary and emergency cover for the NHS.

FOI evidence obtained by ContractorCalculator shows that 94% of workers are being assessed as ‘deemed employees’ which is contrary to HMRC’s intentions that the genuinely self-employed should not be affected.  Blanket bans have had a devastating and debilitating impact on contractors.

IR35 breeds tax avoidance and ruins lives

IR35 has always been a breeding ground for tax avoidance schemes, because it attempts to tax workers at higher tax rates than employees pay yet denies them workers’ rights. The new proposals do the same and run counter to the intentions of the Government’s ‘Good Work Plan’ which is supposed to prevent unscrupulous firms forcing vulnerable and low paid workers into precarious work.

Tax avoidance schemes prey on the vulnerable workers, who cannot afford the large reductions in pay, and as we have seen, this results in catastrophic consequences such as the Loan Charge scandal which has hit the headlines recently.

Similarly, the Off-Payroll rules’ small company exemption is at severe risk of being exploited by contractor clients in its current format, creating problems further down the supply chain. However, expected amendments to the rules could prove a barrier to company growth for some firms in the near future as companies seek loopholes to avoid the rules.

Disruption and damage disproportionate to tax gain

Further doubts have been cast over HMRC’s integrity after ContractorCalculator’s analysis revealed that HMRC’s claim that the cost of private sector non-compliance with IR35 will reach £1.3bn by the 2023/24 tax year doesn’t align with projections from the Office for Budget Responsibility (OBR), the Government body responsible for providing economic forecasts of public finances.

It is unclear where the £1.3bn estimate has arisen from, as it has not been certified by the OBR.  Meanwhile, the OBR’s policy measures database shows that the Off-Payroll rules are expected to net the Exchequer £661m in 2023/24 – effectively half of what HMRC has claimed.

In a response to a Freedom of Information (FOI) request from ContractorCalculator, the taxman conceded that earlier drafts of the IFF Research report, ‘Off-Payroll Reform in the Public Sector’ – being used to justify the reforms, contained information which was subsequently removed.  Its narrowness and selectiveness render it worthless.

UK Plc. simply cannot afford to pay an extra 14.3% to hire self-employed workers

When a firm assesses a worker as a “deemed employee” it is required to treat their income as salary, or employment income. This means a firm must pay employers NI of 13.8% on top, and an additional 0.5% for the Apprenticeship Levy. This is 14.3% in total, which companies can ill afford.

For those contractors who travel and stay overnight for their work, their expenses will no longer be offset for tax purposes, meaning they will need to increase their rate further to compensate.

For some contractors ContractorCalculator has worked out that for the client to retain them, and keep their take home pay the same, it would mean a 40% increase in the total cost.

Firms will have to make some very hard choices about which contractors to terminate, and which projects to delay or cancel, because they will have fewer resources available for the same budgets.

The design of the reforms restricts access to justice and breaches Human Rights

In its latest consultation for Off-Payroll in the private sector, HMRC details proposals for a disagreement process, which is to be led by the client.

HMRC’s proposals are not a proper appeals process and present significant obstacles which would likely prevent affected contractors from accessing justice via the court in a reasonable time with experts saying there is no guarantee that a client-led process would resolve the difference of opinion. Therefore, these proposals remove the contractor’s ability to challenge the decision before a tribunal and appears to fail to fulfil the requirements of both common law and the European Convention of Human Rights.

CEST is unfit for purpose and cannot be fixed before April 2020

HMRC has brazenly disregarded the mounting evidence of CEST’s inadequacies whilst failing to provide anything credible to substantiate its own claims.  Its public defence of CEST is akin to climate change denial and the evidence is indisputable.

Since the Off-Payroll rules were introduced to the public sector in April 2017, CEST has been the chosen status assessment solution for the vast majority of hiring organisations. This is largely due to assurances HMRC provided – that assessments carried out using CEST will be less prone to scrutiny.  However, use of CEST has also coincided with a sharp uptick in contractors being assessed as ‘deemed employees’ and taxed accordingly, something HMRC has neglectfully attributed to heightened compliance with IR35 rules.

A National Audit Office (NAO) report on the BBC’s adoption of the Off-Payroll rules found that, of 663 BBC freelancers assessed using CEST between August 2017 and June 2018, 92% were deemed ‘employed for tax purposes’. When quizzed on this curiously high number at a Public Accounts Committee (PAC) hearing, HMRC’s second permanent secretary Jim Harra insisted that the correct status assessment had been made for each individual. He went on to blame the BBC for failing to identify said freelancers as ‘deemed employees’ earlier, describing the broadcaster’s previous employment status practices as “a bit adrift”. An ongoing investigation conducted by ContractorCalculator has uncovered multiple other public sector bodies whose use of CEST has resulted in almost unanimous ‘inside IR35’ results:

  • HS2 deemed 98% of contractors to be caught by IR35 in 2018
  • Network Rail found 99% of contractors within scope in 2018
  • The Met Office deemed 98% caught between April 2017 and January 2019
  • In the same timeframe, 87% of Crown Commercial Service (CCS) contractors were deemed employees

In essence, CEST is flawed.

Commenting, Chaplin said:

“Having a complex employment status test at the heart of the tax system hasn’t worked for 20 years under the intermediaries legislation and hasn’t worked under the new rules either.  Firms are incapable of applying the rules consistently across the market, leading to market distortion and a tendency for firms to be more competitive if they are less compliant, leading to a breeding ground for tax avoidance.  Certainty is required. If Government want firms to pay more when they hire the self-employed then it should simply introduce an Off-Payroll Tax, of say 2%, that applies to all workers that are hired off-payroll.  Government should finally put IR35 where it belongs – the bad tax bin.

“In a nutshell, Off-Payroll Tax in the private sector will:

  1. Force thousands of contractors into false-employment
  2. Expose self-employed contractors to excessive taxation
  3. Drive up project costs significantly
  4. Deprive UK industry of essential access to key skills
  5. Further incite tax non-compliance and tax evasion

“It must be stopped.”