LIVEBLOG: Lords Finance Bill Sub-committee off-payroll inquiry hearing with tax and accountancy bodies
This page contains a liveblog written during the February 10th House of Lords Finance Bill Sub-Committee evidence session on Draft Finance Bill 2019, focusing on proposed reforms to the rules on off-payroll working.
The House of Lords Finance Bill Sub-Committee is holding a short inquiry into the draft Finance Bill 2019–20.
In scrutinising the draft Bill, the Sub-Committee is focusing on the Government's proposal to extend the off-payroll working rules – which were introduced for the public sector in 2017 – to large and medium-sized organisations in the private sector from April 2020. You can find more information on this, and how to submit written evidence to this inquiry, here.
The first oral evidence session of the inquiry took place on Monday 10 February 2020 from 15.24 to 16.53. It was divided into two panels. Colin Ben-Nathan, for CIOT, and Meredith McCammond, for LITRG, gave evidence in the second.
The sub-committee is chaired by Conservative peer Lord Forsyth of Drumlean (former cabinet minister Michael Forsyth). The committee members are listed here.
You can watch the evidence session here.
This liveblog is based on notes taken during the hearing and word can sometimes be mistranscribed or sentences inaccurately precised. We recommend checking again the official transcript when it appears.
Panel One - 3.15pm
Ms Anita Monteith, Tax technical lead and Senior Policy Adviser, ICAEW
Mr Jason Piper, Head of Tax and Business Law – Professional Insights, Association of Chartered Certified Accountants
Ms Justine Riccomini, Head of Taxation (Scottish Taxes, Employment & ICAS Tax Community), Institute of Chartered Accountants of Scotland
Lord Bridges chaired the opening of proceedings in the absence of Lord Forsyth, who joined later in the meeting.
Lord Desai asked whether businesses were ready for the upcoming changes to off-payroll working. Anita Monteith said that preparedness varied across businesses. She noted that within businesses, different departments may have different interpretations of the guidance, while contractors too needed to understand the rules. Justine Riccomini said that larger businesses may be better prepared than others, but added that no one would be 'completely ready' for the changes because legislation was not fully in place. This meant that businesses - regardless of their size - could only prepare based on the information that they have to hand. She also noted that it was likely that smaller businesses could be less aware of the changes and that within these businesses, there may already be a lower overall level of awareness and understanding of the tax system due to the fact that they may not have dedicated in-house tax functions. Jason Piper agreed that the absence of finalised legislation had hampered preparedness. He noted that HMRC were still provding guidance to organisations a matter of weeks before the new rules were introduced. He said that this was concerning, noting that businesses would have preferred a lead-in time of between 12 to 24 months in order to familiarise themselves with the legislation.
Baroness Kramer asked whether there were steps that could be taken to remedy these concerns. Ms Monteith said that it was perhaps unsurprising for the accounting profession to be asking for extra time to ensure that businesses are ready but that the additional time that had already been granted had been wasted and had delivered little in the way of progress. She acknoweldged that it was unlikely that there would be any further delays in the roll-out of the regime and stated that there needed to be 'real assurance' from HMRC that its enforcement of the rules by officers would be proportionate. She added that ICAEW had provided HMRC with 100 questions on specific, individual technial matters which have gone unanswered. HMRC officers, she said, had informed them that these would become apparent from the guidance it will issue to accompany the new rules. Ms Riccomini said that there needed to be an improved communications campaign targeted at those employers who will be impacted by the change in legislation because this had been stymied by the recent General Election.
Lord Desai asked whether a 'bedding in' process would need to take place before businesses became fully aware of the new regime. Justine Ricommini said that she felt the IR35 changes were being 'railroaded' into the private sector before there had been a chance to properly evaluate its impact on the public sector since its roll-out in 2017. She said this lack of evaluation may reinforce the need to consider whether delaying its roll-out to the private sector was necessary.
Lord Tyrie asked whether the CEST tool was fit for purpose. Anita Monteith descibed CEST as a 'blunt instrument' that provided guidance, but could not fully verify the employment status of every contractor. Lord Tyrie asked the panel if they knew how many people this could impact. Jason Piper said that of the 230,000 self-employed that HMRC estimates will be impacted by the new regulations, around 40,000 (or 15 per cent) would be affected. Justine Ricommini said it was unlikely to expect a significant proportion of these people to become proficient in determining their own employment status. Lord Tyrie also asked whether HMRC was prepared for the introduction of the new rules and whether the mechanisms for dispute resolution were adequate Anita Monteith said that the proposed dispute resolution processes were inadequate. The profession's preference was for there to have been an independent resolutions process, but that the current mechanisms being proposed were contractor led, with an open-ended timeframe for contractors to challenge decisions. All three witnesses expressed their preference for an independent resolutions process providing greater certainty to employees. This should include time-limits for initiating appeals and an improved process for challenging decisions relating to employment status.
Lord Monks asked whether there were any lessons that could be learned from the implementation of off-payroll working rules in the public sector. Anita Monteith said that the establishment of the appeals process and introduction of cut-off rules had provided some clarity. When asked if there were further changes that would be relevant to its extension to the private sector, Jason Piper said that it was still too early to properly evaluate the impact of its use on the public sector as a whole and the contractor community specifically. He also noted that the way in which the public sector used its contractor community was very different to the way in which the private sector engages this community, implying that it may not be possible to compare like for like.
Concerns were also raised at the use of blanket exemptions by employers seeking to minimise their liabilities. Justine Ricommini and Jason Piper noted that there had been areas of the public sector that had suffered resource and recruitment challenges because of the introduction of IR35 (they referenced cases involving the NHS, the construction industry and the Ministry of Defence, all of which had been reported in the press). They also noted press reports of large private sector companies in banking and medicine/healthcare that had chosen to adopt policies against employing off-payroll workers as a means of ensuring that they comply with the law.
Lord Rowe-Beddoe asked if the £14.4 million estimate by HMRC of the cost to business was accurate. The panel suggested that this figure was very low and was perhaps not reflective of the total overall cost. Justine Ricommini set out a number of challenges that businesses could face in their efforts to ensure compliance.
Lord Desai suggested that one solution to the challenge would be to abolish self-employment status. Anita Monteith explained that this was a very complex puzzle and that it was not as simple or straightforward to consider such an approach. She also expressed frustration that the Taylor review of modern working practices had excluded tax from its deliberations, but that the report was now 'gathering dust'.
Lord Forsyth asked about the attitude of HMRC to the reforms. Justine Ricommini described HMRC's approach as intransigent. She also said that the extension of IR35 to the private sector need to be viewed as a temporary move that leads to a wider appraisal of employment status. She suggested that the committee consider the idea of a working group - one that should involve representation from the Office of Tax Simplification - to help take this work forward.
Panel Two - 4.00pm
- Mr Colin Ben-Nathan, Chair, Employment Taxes Committee, Chartered Institute of Taxation
- Ms Meredith McCammond, Technical Officer for LITRG and Chartered Tax Adviser, Low Incomes Tax Reform Group
Lord Forsyth asked whether the proposed rules were sufficiently clear and whether they adequately reflected how contractors operate. Meredith McCammond said end clients when determining status have to apply general employment status tests and these are complex and based on subjective criteria. Hard to apply in borderline cases. Low income workers tend not to be at the borderline, they tend to be clearly employed and have a ‘master-servant’ relationship with their engagers. From a practical point of view she said that she didn’t think there would be many engagers having to do determinations for lower paid workers because, on her understanding, workers who have been put into limited companies by their agencies are going to be taken out of those limited companies and put into other arrangements to save their engagers some tax.
Colin Ben-Nathan this was a difficult area. What is driving this is leakage of tax and NI. Sense of ‘something must be done’. Public sector rules came in April 2017 and the argument is to create a level playing field there is a need to do the same in the private sector. While the rules are difficult in marginal cases, in many cases the rules are more straightforward. But we are mostly talking about case law rather than statutory rules.
Baroness Kramer picked up on Ms McCammond’s comments and asked about the alternative arrangements she referred to. Ms McCammond responded that in supply chains where there are low paid workers there tends not to be spare money floating around so margins intermediaries make are very low. They are very keen to reduce their employment costs. When you pay a limited company don’t have to operate PAYE, and no NI charge. Kramer had referenced the loan charge and McCammond said loan arrangements were still out there in the market. About 8,000 people still in loan arrangements of whom c3,000 new users. There should be alarm bells at HMRC. Not all umbrella companies use loan arrangements. Some treat workers well, others use halfway houses.
Lord Bridges asked about CEST. Ben-Nathan said CIOT had asked for CEST to be improved, we now have new version. It is an instrument that provides a safe harbour for those who use it directly but it is a blunt instrument. Difficult to build a tool that works for all sectors. A lot of sympathy for HMRC aiming to reduce the number of cases where CEST returns a ‘don’t know’. Bridges asked how many of the areas identified by CIOT in its July 2019 press release as deficiencies in CEST had been addressed. Ben-Nathan said business on own account addressed; mutuality of obligation (MOO) not described as such in current version of CEST tool. Our view is life would be clearer if MOO was directly addressed.
How satisfied are you that HMRC have the resources to address the unclear cases (the 15% of ‘don’t knows’), asked Bridges. Ben-Nathan said the alternative approach would have been to put more resources into getting it right. Suspect the resource issue is on HMRC’s minds and they’ve thought ‘wouldn’t it be easier if we use the public sector model to look at those who are actually engaging as a funnel’.
McCammond said LITRG had tested the CEST tool and before the recent tweaks language was coming out at reading age 12 – the same as Harvard Law Review. HMRC have worked on language and questions are now easier to understand. Ben-Nathan agreed questions easier to understand at first glance but also now detailed guidance on what the questions mean, though it is not linked to through the tool (only at start).
Lord Desai wondered if there was an algorithm which could capture everything by making it very simple. Ben-Nathan said CEST was a set of algorithms. But you can see finessing. Lord Forsyth wondered if getting a particular answer on CEST indemnified you. Ben-Nathan said a safe harbour is conditional - you have to have answered the questons correctly. It's not straightforward in marginal cases.
Baroness Kramer said if HMRC were here they would be concerned about umbrella companies becoming the primary way by which people employ contractors but I can't see how this doesn't drive people towards umbrella companies. Are you seeing companies playing safe by going for blanket categorisation and making it clear in effect that if you want to work for that particular company you need to be employed by an umbrella company? Ben-Nathan said his experience with larger clients was they are being careful because PAYE liability will fall on them but also asking themselves 'do we want to deal with all these personal service companies in any case'? They are taking the opportunity to review their cost base, maybe take people on as employees (part or full time), might request people work for agencies as individuals (there are special rules dealing with those who work for agencies), or might look to umbrella companies. These come in all shapes and sizes. COncerns around those who are not compliant. My sense is HMRC are looking to end clients to take control of their supply chain from a governance perspective. He reminded the committee that as well as tax aspects there are employment rights aspects including obligations on umbrella companies.
Lord Bridges referenced CIOT's September 2019 representation on the changes. Ben-Nathan said the public sector introduction of the proposals was rushed and there was a need to learn from that process. The guidance last summer was very basic, not technical at all. After that HMRC began to develope more technical guidance. Last week they released where they have got to on that guidance. But we are now in February. Large companies have been aware of these changes and have done best they can to assess their workforce. McCammond said LITRG would like to have discussions with HMRC to make sure they are fully aware of what is going on in terms of people being moved into schemes ahead of April 2020. Umbrella companies can just fold if faced with demands for tax. New rules come in in April 2020 which will help HMRC clamp down on this - company directors can be held liable for debts of limited companies in certain circumstances. If HMRC can use these powers that will help clamp down on more unscrupulous umbrella companies. In terms of loan arrangements there is a big work awareness project needed. HMRC working on some comms but HMRC have been very passive so far. New guidance put up on gov.uk but unless you go looking for it you won't find it. What is needed is specific outreach work - eg posters in work environment, cascading mesages down through unions and other worker representative bodies.
Lord Rowe-Beddoe asked if LITRG had had difficulty getting meetings with HMRC on this subject. McCammond said LITRG had had meetings with HMRC about the loan charge but on umbrella companies there is a blind spot within HMRC on how the temporary labour market works and all that comes from that. We would be happy to sit down with HMRC and tell them all we know about this, she added.
Lord Forsyth said the committee had already had 300 emails on this inquiry, all telling broadly the same story. He had been surprised by the scale of the reaction. McCammond said some more time to evaluate the impact on the public sector would be useful, including looking at workers coming out of public sector limited companies and into other arrangements would be useful. Forsyth said he was struck by the number of people not getting communications. Ben-Nathan said the communication needed to be ramped up. The ongoing review made things difficult because no-one wants to prejudge review. There are going to be difficulties here - need to take a light touch on penalties etc. But difficult to put into reverse given lots of businesses prepared.
Ben-Nathan suggested there was a need to take a step back and look strategically at the question of how we tax labour - employed and self-employed. The issue that sticks out is employer's NICs. That is a key issue which needs to be addressed. Personal view - a gentle landing.
Lord Tyrie asked if Colin Ben-Nathan had confidence in the review. Ben-Nathan said he had been involved in detailed discussions with HMRC and HMT. It is not an independent review - being conducted by HMRC. I believe CIOT and others are being listened to. Friday announcement reflects that listening.
Lord Tyrie turned back to the 'dark arrangements' Meredith McCammond had highlighted. Is HMRC taking decisions based on ignorance, he asked. McCammond said the use of 'dark arrangements', the things that underpin them all are the faultlines in the system - between tax and NI, employment and self-employment, tax law and employment law, permanent and temporary workplaces. Those faultlines drive distortive behaviour. Measures like IR35 just put sticking plasters over those faultlines. Better approach would be comprehensive review of the system that underpins the labour market. Long term, sustainable solution needed, she said. Ben-Nathan said in some of these 'dark arrangements' we are talking about evasion - and there a different approach is required.
Lord Monks asked if the comprehensive review the LITRG representative advocated would include aligning employment law with tax, and how this would be done. Ben-Nathan referenced the Taylor Report (the Good Work Plan). View of CIOT is need to codify what we mean by employment and look to have some solid ground to build on rather than shades of grey of case law. McCammond said it would make sense to copy across employment status from one regime to another. Our view is if you are in 'master-servant' relationship for tax law purposes you need some sort of protection from employment law. Appreciate it does get more complex than that in terms of how full rights are and which entity in supply chain responsible.
Baroness Kramer asked whether the panellists knew how many companies had decided not to work with contractors in future. Ben-Nathan said in the banking sector the view he had heard was going forward taking on contractors was just too difficult - 'we should taken on the ones we want to take on'. But in some cases businesses willing to make an exception. Kramer observed that people she had spoken to in creative industries who needed to be tied to particular companies for a period of time and if you put them through CEST they come out as employed. Ben-Nathan said there was a potential imbalanec of people subject to tax and NI but without employment rights. That was raised in employment status consultation a couple of years ago, and we are still waiting for a policy decision.
Lord Bridges observed this didn't look like a good example of joined-up government. Ben-Nathan observed that successve goes at this had run into political problems because people have a variety of views as to what the answer should be.
Lord Desai asked whether use of contractors at low paid end was about making employment precarious and at top end tax avoidance. Meredith McCammond said that at the bottom end we see lots of false self-employment so engagers can avoid employer obligations such as employer NICs and national minimum wage, and also auto-enrolment and grappling with real-time information. Not necessarily the same driving factors at the high end.
The session ended at 16.53.
Live blog by George Crozier and Chris Young, CIOT External Relations Team