Extending Off-Payroll Reforms to the Private Sector?

Here we go – the consultation about possibly extending the off-payroll working regime from the public sector into the private sector.  This is something that all UK professionals need to pay attention to.  If the off-payroll working reforms are rolled-out to the private sector, this will have significant implications for our sector and our workers.

The first thing to say is that the new consultation entitled ‘Off-Payroll working in the private sector’ is NOT a surprise:

• Budget 2017 announced that one would be coming in 2018 and
• Although it was not directly mentioned in the March Spring Statement, buried in the House of Commons Hansard, volume 637 is a line that quotes the Chancellor of the Exchequer saying ‘In the coming months the Government will publish ‘Off-payroll working —a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform’

Employment law and rights do not sit comfortably with Income Tax and Social Security obligations. This is particularly so when to comes to looking at the employment rights versus Income Tax and Social Security obligations of the resulting off-payroll status ‘deemed employees’ – i.e. they are deemed to be employees for Tax and National Insurance but not deemed to be an employee or worker for employment rights. 

The off-payroll consultation does not attempt to consider the complicated interaction between the two, indeed, this is covered in the ‘Employment Status’ consultation (from 10.6).  However, the UK Government says that it ‘recognises that the interaction between the employment status tests for employment rights and tax is an important and complex issue, and so will work with stakeholders to ensure that any potential changes are considered carefully’.  Comforting words.

The off-payroll consultation is split into two parts:

This is about reviewing and evaluating the effectiveness of the April 2017 changes to the off-payroll working rules in the public sector and starts from Part 4 (page 12).  The reforms were that public authorities now have the responsibility for determining whether the IR35 ‘intermediaries legislation’ rules apply rather than the worker.  If they do, the public sector employer must call the worker a deemed employee and deduct and pay over tax and National Insurance on the deemed employment income. 

With this part, it is also worth reading the 58-page research project that ‘looked at the immediate impacts on public sector bodies of implementing the reform of off-payroll working’.  Whilst this is published by HMRC, the disclaimer at the front of the project says that it does not necessarily reflect their views.  Although, it is fair to say that the generally positive nature of the public sector experience of off-payroll outlined in this report makes it comfortable reading for HMRC.

This section does not ask any questions specifically but it is essential reading to set the scene for Sections 5 and 6 which are about possibly extending the off-payroll reforms in the public sector to the private sector.  Further, the first part of the consultation document makes claims about the performance / non-performance of the Check Employment Status for Tax (CEST) service.  This is an essential digital service and would form the basis of a similar service if the off-payroll public sector regime was extended to the private sector.

This consultation is not just for employers / agents / bureaux in the private sector. Those already operating the regime in the public sector should also read and respond to this consultation.   

From Part 5 (page 17) it is about the UK Government exploring how best to tackle their perceived continuing non-compliance with the rules in the private sector – i.e. non-compliance with the April 2000 IR35 legislation that says that people in work who would have been employees if they were directly engaged should pay, broadly, the same employment taxes as if they were employed.

IR35 is described as a complicated and costly administration exercise for HMRC – ‘economically inefficient’ and ‘burdensome’ are two of the words used.  Of course, this is the view of the UK Government who look to reform the off-payroll rules in the private sector by saying this would be reduced and deliver ‘fairness’ in the tax system.  What is fair to say is that the business benefits of IR35 in the private sector is not discussed, at least as far as I can see. 

There are a number of options (within the scope of the consultation) on how this reform could be achieved and these options form the basis of the questions:

The UK Government believes this to be the most effective way of tackling non-compliance.  This is quite clear as the ‘lead’ option.  Under this option, the private sector engager or fee-payer (employer) would look at the worker, assess if they worked through an intermediary (such as a Personal Service Company (PSC)) and then deduct the relevant Tax and National Insurance.

However, the UK Government is keen to alleviate any problems encountered by the public sector and seeks views on whether the current regime should be reformed and the implementation process improved.

This option warrants 12 questions.

This is classed as a different approach to tackling non-compliance.  Simply, and not comprehensively at all, this option would require the private sector end-user of the worker to perform a number of checks to ascertain how the labour was provided and inserting various clause into the contractual arrangement.  These would be for the purposes of checking that things like the labour supply chain is sustainable and can pay its taxes.

This is recognised as administratively burdensome on the employer and warrants 11 questions.

This option starts by saying that HMRC’s efforts at tackling non-compliance is time-consuming on them as they need to gather a range of information from a number of different sources. To put it simply, the option for additional record keeping transfers the administrative burden from HMRC to employers that make the payments.  This would mean them keeping a range of information to help HMRC do their non-compliance checks more quickly.

This is recognised as an administrative burden, which seems totally contrary to the opening line of this part of the document which says that the UK Government ‘understands the importance of minimising administrative costs for businesses’. 

This unworkable option warrants 7 questions.

This section (on page 26) simply asks if there are ‘other options to tackle non-compliance in the private sector’ that have not been covered by the above 3. 

This single paragraph asks 2 questions.

There is a single question on page 26 that asks if there are ‘any other issues which businesses or individuals who may be affected would like to raise’.  I hope that I speak professionally, however, I am sure that there are a number of issues to raise – but consider whether they should be in the sections above. 

It seems to me that the UK Government has already made its mind up to be honest.  The labour chains option seems a no-go for employers and is recognised as administratively burdensome.  Additional record keeping is also administratively burdensome, essentially making the employer responsible for making it as easier as possible for HMRC to carry out their compliance checks.

Which leaves the only other option of extending the public sector regime to the private sector. However, this is beset with issues itself, not least:

• This is also administratively burdensome!  More people for Tax and NICs means more people on the payroll and more data gathering. Particularly affected will be the SME group, a body of employers that can least afford the additional administration
• Will employers know who is caught by the IR35 reforms and is the Check Employment Status for Tax (CEST) service fit for purpose?
• What will HMRC’s guidance look like and when will it be available?  There is a factsheet explaining the consultation and giving an overview.  However, the reforms are much more than just looking at the examples of Alan and Jemima. The Rumour versus Fact area of this factsheet is interesting but it doesn’t reflect the facts as I am reading about them!    
• Can HMRC’s systems differentiate between deemed employees for off-payroll and employees? They can’t at the moment, which leads to us having to ignore things like Student Loan notifications
• What will UK payroll software have to do to accommodate more people on the payroll in an effort to stem the UK Governments estimate of ￡700 million cost to the Exchequer (and rising)?

I would point out that it is not a certainty that the off-payroll rules as they apply to the public sector will be extended to the private sector.  However, this is the preferred option and there are no other workable options offered – unless we can come up with one that works for HM Treasury (in terms of revenue), HMRC and the employer (in terms of the administration burden).

One comfort is the line that the UK Government ‘is committed to learning from the experience of the public sector implementation. We will take account of the needs of businesses and individuals who would implement any change and are keen to hear from those who would be affected’.

Nevertheless, it is absolutely essential that UK payroll professionals respond to this consultation.  There are operational and administrative questions too numerous to mention and, possibly, we have an opportunity to influence the outcome.

So, April 2019 is not a certainty, although the timing of this consultation is important:

• The consultation opening date is 18 May 2018, the closing date 10 August 2018 – that is 84 days or 2 months and 23 days
• There is plenty of time for the UK Government to be able to respond to this consultation at Budget 2018 with an April 2019 implementation date

Be very watchful of the progress of this!