HMRC research finds 'resistance' to proposals to shift contractor tax compliance burden

Oh well

There is "general resistance" among both the public and private sectors to plans that would shift responsibility for ensuring that third party contractors are paying the right employment taxes from the individual to public sector employers, HM Revenue and Customs (HMRC) has found.

Employers surveyed by HMRC were concerned about the impact the proposed change would have on both employers and employees, particularly in relation to new administrative burdens and an anticipated loss in flexibility.

Respondents were also "cynical" about the need to shift compliance burdens in the first place, and said that the "current economic climate" meant it was not a good time to introduce "another burden", according to a summary published by the tax authority.

HMRC is currently consulting on whether to shift responsibility for compliance with the intermediaries legislation, known as IR35, from the individual contractor to a public body which contracts with them for their services or to the agency or other third party through which employment is arranged</. The consultation was prompted by "evidence of widespread non-compliance" with the existing rules, and closes on 18 August.

Employment tax expert Chris Thomas of Pinsent Masons, the law firm behind, said that the results of the research were "no surprise". However, the findings "emphasise once again the difficulties and disruption which employers would face if the responsibility for determining employment status is put onto their shoulders", he said.

"This would impose a significant burden on employers who use temporary labour, not just in terms of higher PAYE costs but also the admin and management time required in working through tests which they are not necessarily well-placed to answer," he said. "There is a real risk that this could undermine the labour market flexibility which the government purportedly wants to promote."

"There are also legitimate concerns that any 'simpler' test for determining employment status is likely to move the goalposts in favour of HMRC and result in a higher number of individuals falling under PAYE," he said.

First introduced in 2000, IR35 is intended to stop contractors from using a personal service company (PSC) in order to avoid paying income tax and National Insurance contributions (NICs). A PSC is typically a limited company through which a worker is contracted to supply services, but of which the contractor is the owner and sole director. Where IR35 applies, the contractor must pay broadly the same tax and NICs as an employee would.

HMRC has proposed shifting the compliance burden from contractors to public sector engagers where the individual is "doing a similar job in a similar manner to an employee", according to the May consultation. Responsibility for compliance in the private sector will remain with the individual. HMRC has also proposed simplifying the existing 'employment status' test so that it is "easier and more straightforward for an engager to decide if an engagement is in or out of the scope of the rules", according to the consultation.

The research, which was carried out between September and November 2015, revealed concerns among employers about the potential costs and administrative burdens of the changes. Some employers suggested that they might have to implement new administrative systems, and to monitor the employment status of their contractors on "a more ongoing basis".

Employers also suggested that the changes would lead to them "err[ing] on the side of caution" and engaging more staff though payroll, perhaps on temporary contracts, according to the research. This would reduce the flexibility sought by both employers and individuals under the current system, as well as increase the costs to employers of holiday pay and other aspects of the employment relationship.

The concerns raised by respondents to the survey were shared both by those that regularly contracted with PSCs and those that only used them very rarely. Respondents also called for more information and clarity around how the rules would be applied, and for HMRC to re-think the test it proposed to use in relation to employee status. Most contractors were likely to be caught by a 'supervision, direction or control' test, according to the feedback.

In its May consultation, HMRC said that its intention was to introduce the change in liability from April 2017. Employment tax expert Chris Thomas said that it was not clear whether HMRC would press on with the changes despite the widespread resistance identified by the research.

"This is an area where there have been proposals for reform before which ended up being dropped," he said.

"However, HMRC is very keen to see the compliance burden moved to employers as it considers that a lot of tax is being lost due to the rather cavalier approach that many PSCs take to applying IR35. The UK government will also be looking at ways to fix any post-Brexit hole in the public finances without obviously raising taxes," he said.

Copyright © 2016, is part of international law firm Pinsent Masons.

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