Lords off-payroll recommendations get little movement from ministers

A letter from Financial Secretary to the Treasury Lucy Frazer MP to Lord Bridges of Headley, Chair of the Lords Economic Affairs Finance Bill Sub-Committee, thanks the sub-committee for their work looking into the recent reforms but offers no indication that the Government shares peers’ sense of urgency about action to counter rogue umbrella companies, or to implement the proposals of the 2017 Taylor Review of Modern Working Practices on employment rights.

The sub-committee wrote to the minister (see Peers demand action on Taylor Review findings in follow-up report on off-payroll working, CIOT blog, 11 February 2022) after a brief ‘follow-up inquiry’ carried out shortly before Christmas 2021, which took evidence from CIOT and our Low Incomes Tax Reform Group (LITRG) among others (see CIOT representative sets out need for employment tax codification, CIOT Blog, 17 December 2021). This mini-inquiry followed up a previous inquiry which reported in April 2020 (see Peers urge government to rethink ‘flawed’ IR35 rules, CIOT Blog, 1 May 2020).

The peers’ recommendations were divided into seven areas.

Implementation and communication

Citing evidence from CIOT and LITRG (among others), the sub-committee was positive about HMRC’s efforts to communicate changes to off-payroll working rules, especially amidst the backdrop of the pandemic. The sub-committee stated that it looked forward to seeing the results of HMRC’s research into the short-term effects of the public sector reforms.

In the Government’s response the minister welcomes the sub-committee’s remarks in this area and commits that “HMRC will continue to work with its stakeholders, including the IR35 Forum, to ensure that guidance and support is effective and targeted at those who need it.” The Government’s response on HMRC’s research is covered under ‘Labour market impact’, below.

Check Employment Status for Tax (CEST) tool

The sub-committee called on HMRC to acknowledge the limits of the CEST tool and recommended that more be done to provide advice and support to those who require further clarification of their employment status. They highlighted that many users lack confidence in the results provided by the tool, and has asked the government to engage with users to improve processes, particularly with respect to the “mutuality of obligation” test.

The Government’s response defends the CEST tool, and its accuracy in cases where it is able to provide a determination (about 80 per cent of the time) while acknowledging that in some cases it is unable to provide this. In one of very few concessions to the sub-committee’s representations the minister states that HMRC “will review the current signposting for customers who receive an ‘unable to determine’ outcome from CEST, to ensure that customers are clearly directed to further sources of support to reach a status determination, including supplementary guidance and helplines.”

On mutuality of obligation the government response is that it is significant because it determines whether there is a contract in existence, but CEST starts from the (clearly stated) presumption that there is a contract in place, only seeking to determine whether it is an employment or a self-employment contract.

The minister commits that HMRC will update CEST whenever there are changes to the existing case law on employment status.

Status determination

The sub-committee had suggested that tougher compliance action is needed where engagers are, by making blanket determinations, effectively evading their obligations under the rules to make individual determinations.

The minister’s response seeks to assure peers that blanket determinations are ‘extremely rare’, according to the independent research commissioned by HMRC into the implementation of the public sector reform. HMRC’s research into the impacts of the 2021 reform will also look at this issue. However, the minister states, HMRC has already commenced compliance activity in this area, which includes checking a client’s decision-making process for status determinations. Where HMRC does identify instances of blanket determinations, it will ensure that incorrect determinations are corrected.

Labour market impact

In some of its strongest words, the sub-committee told the Government that it was ‘very concerned’ about the impact the changes are having on the labour market. It recommended that the external research which HMRC has commissioned into the implementation and short-term effects of the extension of the off-payroll rules in the private sector should be made comprehensive and accelerated, and published in full. It also stated that the research should invite input from affected contractors as well as engagers and intermediaries.

The Government’s response agrees that the external research HMRC has commissioned into the impacts of the 2021 reform should be conducted expeditiously and states that it will be published this year. The minister updates the sub-committee that fieldwork is currently being conducted with clients, as they have the most responsibilities under the reform, and the clearest understanding of how they are engaging contractors. “More broadly, the research will also seek to understand any changes to how contractors are engaged and changes to rates of pay for contractors, as well as insights into how determinations are made and disputes handled.” Work with contractors, predominantly focusing on tax information and advice but also asking about the impacts of the new rules, is ongoing and will be published later this year.

As to whether the scope of the research should be wider, the Government say this would be challenging to change now that fieldwork is underway, but they will consider the case for wider research on an ongoing basis.

Impact on businesses and workers

The sub-committee took the view that HMRC “has failed to appreciate the burden of costs the new rules are imposing on compliant companies.” Witnesses had expressed concern that HMRC had persistently underestimated the one-off and continuing costs and burdens to businesses and workers.

Responding, the Government states that while there is ‘anecdotal evidence of some organisations spending larger amounts’, the administrative burdens are estimated in accordance with ‘a well-established methodology’. They draw a distinction between ‘what organisations may choose to spend on complying with the rules’ and ‘what they need to spend to be compliant’. Estimates of administrative costs are of the latter, though HMRC’s evaluation of the impacts of the reform does attempt to understand the actual amounts being spent.

The peers also expressed concern that many engagers are effectively passing on employers’ NICs through reduced rates of pay, adding that: “It is lower paid contractors with the least bargaining power who are most disadvantaged.”

The Government responds that HMRC is looking at who ultimately bears this cost in its research. It notes that at an economy wide level, it is standard for employers to set wages with regard to the overall tax bill. However, “[w]hile not necessarily representative of the private sector reform, the external research into the effects of the reform in the public sector show that the majority of organisations did not change the rates paid to contractors following the reforms, and those that did were more likely to increase pre-tax rates than decrease them.”

Umbrella companies

The sub-committee observed that the off-payroll working rules appear to have resulted in an increased use of umbrella companies, some of which are associated with tax avoidance. They described this as ‘highly regrettable’. While welcoming the Government’s call for evidence on umbrella companies, and the work HMRC has done to counter rogue umbrella companies, they said that this work needs greater urgency.

In its response, the Government sets out the action it is already taking in this area, including a number of arrests made by HMRC’s Fraud Investigation Service in relation to mini umbrella company fraud. Looking forward the Government says it “will need to carefully consider industry and stakeholder feedback to the call for evidence to inform any future policy decisions in this area.”

The sub-committee asked specifically for the Government “to commit to a date for bringing forward legislation to create the proposed single enforcement body to regulate umbrella companies.”

The Government do not make a commitment on this in their response, noting only that creating a new body such as this is a ‘substantial organisational change’, requiring careful consideration, and legislation will be brought forward ‘when parliamentary time allows’.

Employment status

In their letter to the minister the sub-committee argued that, “if the Government is truly committed to fairness in the workplace, it must take a coherent approach to the issue of employment status, which considers both tax and employment rights. It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment.” To address this, the sub-committee reaffirmed its 2020 recommendation that the Government should implement the Taylor Review proposals, adding that it now sees “even greater urgency in defining employment status for both tax and employment rights purposes.”

The Government’s response to the peers offers little reassurance in this area. It notes the distinction between the tax and employment rights frameworks and that the latter “aims to protect workers without putting unnecessary burden on businesses.” Looking forward it states that “[w]e are working cross-Government on these issues and how best to address them in the current context and will set out more detail in due course.”

By George Crozier, CIOT External Relations Manager