HMRC 'learned lessons' from 2017 off-payroll changes, says Financial Secretary

The minister was joined at the Economic Affairs Committee Finance Bill Sub-Committee hearing on off-payroll working by Carol Bristow, Director of Individuals Policy, HMRC, Pete Downing, Deputy Director Employment Status and Intermediaries, HMRC and Suzy Kantor, Director, Personal Tax, Welfare & Pensions, HM Treasury. This followed earlier hearings where witnesses from CIOT and its Low Incomes Tax Reform Group (LITRG), among others, had given evidence.

The off-payroll working rules (also known as IR35) make sure that workers who would have been an employee if they were providing their services directly to the client, pay broadly the same income tax and national insurance contributions (NICs) as employees. From 6 April 2017 public authorities became responsible for deciding if the rules applied where they contracted workers who provide services through their own intermediary. And from 6 April 2021 all public authorities and medium and large-sized clients outside the public sector are responsible for deciding if the rules apply in respect of people they contract to work for them. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and whether the rules apply. If the rules apply, income tax and employee NICs must be deducted from fees and paid to HMRC. In addition, employer NICs and Apprenticeship Levy, if applicable, must be paid to HMRC by the person who pays the worker’s intermediary.

Conservative Lord Bridges of Headley, the chair of the sub-committee, asked if the new off-payroll working rules have achieved their objective. Lucy Frazer said ‘yes’ because people are being treated equally. She pointed to HMRC’s external analysis of the 2017 reform, that shows at least 50,000 people are enrolled in PAYE in the public sector who were previously providing services through personal service companies (PSCs), generating additional revenue of £250 million in 2017-18 and £275 million in 2018-19.

Frazer accepted the 2017 public sector changes were ‘a little rushed’ but said HMRC learnt the lessons for the roll-out to the private sector in 2021 when it comes to education and making the system simpler: HMRC developed sector-specific content, produced a large number of factsheets, hosted more than 40 joint events with stakeholders and made 949 calls with the largest businesses. HMRC has made ‘significant’ improvements to CEST, she added.

Baroness Noakes, Conservative, asked for an overall assessment of the implementation of the new off-payroll rules. Frazer replied that both CIOT and LITRG had commented on HMRC’s much improved system. She said: “I know the CBI told the committee that the majority of businesses were prepared. In its written evidence, I spotted that the Chartered Institute of Taxation said that the experience from the public sector rollout and the additional year’s delay meant that HMRC was in a better position to provide support. In the January 2021 study on education sites, three-quarters of them said that it had been easy to comply with the changes. Obviously, those were the earlier ones. I would say that HMRC put in a lot of work. There have been significant improvements. Like all systems, more improvements can be made.”

HMRC’s Pete Downing said 30 full-time equivalents are deployed to the compliance team for off-payroll and that is being expanded by ‘another few’ before the end of this financial year.

Downing told Baroness Harding of Winscombe, Conservative, that over the last 12 months, HMRC had an average of 2,700 calls per month on the CEST helpline (which people tend to use if they get an ‘indeterminate’ answer on CEST). The average customer satisfaction for calls is about 80 per cent. Between March 2020 and November 2021, 98.6 per cent of calls were answered, which includes work on the off-payroll rules and CEST. The average call waiting time was about 45 seconds, he said. Lord Bridges was impressed with the figures.

Lord Monks, Labour, is concerned that people are alleging to peers that there is a reduction in the number of workers working flexibly because of these new rules, adding that the UK is losing high-skilled workers to other countries who do not want to work under the new regimes, and others who now work only for smaller companies not covered by the rules in the same way. The peer claimed the shortage of lorry drivers has been caused, at least in part, by these changes, for instance.

The minister replied that Brexit and COVID-19 are having a massive effect on labour supply. But, she claimed, there was no significant change in labour market supply because of the 2017 reforms in the public sector and the Treasury will report on the 2021 reforms next year. She said only three per cent of road haulage workers worked through a PSC, so the impact due to IR35 would have been ‘very insignificant’.

The Treasury’s Suzy Kantor said a lack of HGV drivers is a global problem and cited transport intelligence estimates that there is a shortage of around 400,000 in Europe. Frazer added that there are some sectors where it is not usual to have a PSC operating and where we have labour shortages, such as hospitality. But Lord Bridges cited the Association of Professional Staffing Companies as saying that off-payroll working has contributed to job vacancies as it has reduced the flexibility of the UK’s labour market. Frazer responded that the Treasury is doing a study on the impact.

Carol Bristow told Baroness Kramer, Lib Dem, that, of the total number of PSCs, HMRC expect 180,000 to be ‘properly engagements’ that they would characterise as ‘employment’, leaving 60,000 as being ‘properly self-employed engagement’.

Appeals process

Kramer is concerned to hear evidence in this inquiry from people that who find that, for an employer or an engager, the off-payroll rules create a problem: they are either not offered work or they are offered work only if they accept PAYE status. The peer is also concerned that there is no third-party appeal mechanism.

HMRC’s Downing responded: “There is a defined process for dispute by the contractor with the engager who is making a determination of status for a PSC. You have heard evidence from IPSE that that is having an effect and changing people’s status in some cases, which is encouraging to hear. There are cases that go to tribunal. They are small, but 35 cases have been taken to a tribunal since 2000. Some people do have a legal determination at the end of the day.”

Crossbencher Lord Butler of Brockwell is unhappy because his wider belief is that it is for the individual to establish their relationship with HMRC, not a third party. HMRC’s Bristow said the plan is to try to encourage employers to self-correct. We are not going to charge penalties when we see an error, she added.

Baroness Noakes commented that the contractor may think, ‘there’s no point in me arguing with this employer. I’ve still got the right to fill in my self-assessment tax return in the way that I think is appropriate’. HMRC’s Downing said this will continue to be the case. He went on to explain that if a contractor makes a self-assessment return, they can disagree with that status assessment in that return. That is subject to them making sure that they are taking reasonable care in order to do so, because there is a potential liability to penalties if they have got that wrong. They would also have to make similar amendments, for example, to their company tax return, he said.

In other comments, Lucy Frazer (photographed below courtesy of Parliament UK)  told Baroness Kramer that the independent Administrative Burdens Advisory Board said the estimate of one-off costs of £19.7 million and £8.4 million in ongoing costs is ‘sound and reasonable’.

Check Employment Status for Tax (CEST)

Frazer said that HMRC have decided that, in order for it to be easy to use, not be expensive and not take up too much of people’s time, HMRC will deal with the fact that only 80 per cent of cases get a clear determination from CEST (‘the 20 per cent can have some telephone support to come to their determination’). 

However Lord Bridges is not happy with this situation. He remarked: “The situation with CEST is so bad, you could say, that it has given rise to a whole new market of private providers guiding you through this labyrinth. You only have to type in ‘CEST off-payroll working’ and you get all these offers of help and support. This is the problem that we have got to; it has now become oversimplified. Specifically, mutuality of obligation is not in there, because it is so difficult. It is a tool that is really not worth it for many people. It will introduce complexity for many people.”

Frazer disagreed with Lord Bridges, saying ‘by some distance, a majority are getting the determination they need’ and the number of tribunal cases is low. She also disagreed with Bridges’ view ‘that you can essentially game CEST to get the right answer’.  

Impact of HMRC v Professional Game Match Officials Ltd on mutuality of obligation and CEST

Reflecting on this case, HMRC’s Downing took from it that the irreducible minimum test for mutuality of obligation is as HMRC have said it is for some years now and, indeed, reflects how CEST treats that for the purposes of determining employment status. But Baroness Kramer’s view is that it is far more complex and will need further court rulings.

In a separate comment, Downing told Lord Bridges that HMRC is not treating CEST as the only determiner of payroll status and HMRC never aims to exclude other tools from the market.

On peers’ concerns that some engagers are using blanket assessments, Frazer said that that there is no widespread blanket assessment. Turning to the 2021 report on education (relating to off-payroll changes in the public sector), the vast majority – 86 per cent - assess contracts on a case-by case basis, and 31 per cent used role-based determination, she said.

Umbrella companies

Baroness Harding asked whether the recent call for evidence on ‘umbrella’ companies is motivated by concerns that the new off-payroll working rules have led to increase in their use. Lucy Frazer replied that the government wants to have an up-to-date and well-informed view of how the umbrella company market operates. We want a cross-governmental understanding of the issues, the FST said. But she did not give a date for the setting up of a single enforcement body to regulate ‘umbrella’ companies.

Frazer added that there are a number of measures in the current Finance Bill going through Parliament, to deal with promoters and those who associate with promoters. Lord Bridges intervened to suggest a big unintended consequence of these off-payroll changes is potentially shifting many people, unwittingly, into umbrella companies that are not compliant. But Frazer said that is no reason not to bring in the reforms, not least because many umbrella companies operate appropriately.

Baroness Kramer remarked that ‘the breadth, scope and impact of the implementation on the economy and society are completely different today. I doubt many people would have recognised today’s circumstances when IR35 was originally drafted’.

Frazer explained to Viscount Chandos, Labour, that if engagers are deducting NICs from agreed pay with contractors, that is illegal, and she is keen to see any evidence of this sort of thing.

In other comments, Frazer said the labour market as a whole is about demand and supply generally in terms of what wages people are paid. If there is a shortage in these areas, she would expect there to be competitive bargaining for those who are fulfilling roles in short supply.

On the Taylor Review, Frazer said BEIS continue to look at the recommendations closely and it is wrong to think the government is kicking it into the long grass. But she could not offer any update on the separate employment status consultation, which came from BEIS, not the Treasury, back in 2018.

Lord Bridges closed the session by saying: “Let me just remind everyone of what we were told in our previous investigation of this. Many witnesses told us that it made them ‘zero-rights employees’, with none of the rights of being an employee or the tax advantages of being self-employed. Is that not why we urgently need to look at the whole package of rights and tax together now, as the government promised in their manifesto?” Frazer replied that ‘we need to recognise that we are in the middle of a pandemic and there is a particular strain on businesses at the moment’.

The transcript is here.

By Hamant Verma, CIOT Senior External Relations Officer