Hard on the heels of the new business entity tests to ‘improve’ the administration of IR35 come the public sector off-payroll rules and the controlling persons legislation proposals. You might think that these are a hangover from the Labour government that introduced IR35 and the Managed Services Companies (MSC) legislation. But no.
These horrendous sticking plasters, which will benefit nobody, are proposed by the same government that introduced the Office of Tax Simplification (OTS). The same outfit that seems intent on destroying one of the UK’s major sources of competitive advantage in the global marketplace – contracting.
A confused-to-the-point-of-being illogical administration which insists that the public sector becomes leaner and more effective; yet at the same time plans to remove in a single expensive crowd-pleasing gesture the effective mechanism for injecting the process and organisation change expertise required to improve service delivery at lower cost.
Under the off-payroll rules being introduced in September, contractors working for a government client, earning over £219 and on assignments lasting longer than 6 months, must demonstrate to their client that they are genuinely self-employed, or go on the payroll. And the hastily cobbled together controlling persons legislation proposals, out for consultation and to be introduced in the March 2013 Budget, will require contractors with significant line and budget management responsibility to go on their client’s payroll, regardless of the actual commercial arrangements between contractor and client.
What’s so frightening about these proposals is not the fact that the government deems it has the right and power to ride roughshod over legitimate commercial arrangements, although that’s pretty scary in its own right. But no, of greater concern are the proposed frameworks by which contractors will be judged to be either a controlling person or not genuinely self-employed, based as they are on flawed and inappropriate methodologies.
According to the latest Treasury guidance for government departments on how to implement the off-payroll rules, which were leaked to PCG, when a contractor triggers the off-payroll rules they must demonstrate their genuine in-business status by using the new business entity tests to show they are in the low-risk category for IR35.
But the business entity tests bear no relationship to the underlying IR35 legislation and nor are they grounded in case law. Because of the business entity test scoring imposed by HMRC, the vast majority of genuine contractors fall into the medium- and high-risk categories, unless they have substituted. As a result, are we likely to see a rush of unnecessary or even sham substitutions?
We know from the results of ContractorCalculator’s IR35 Test that many genuine contractors fail IR35 on substitution, but pass on the other key factors of control and mutuality of Obligation (MOO). Of the 11,000 contractors who have taken the test so far, only16% can substitute but 66% are not controlled and 60% have no mutuality of obligation. Based on this statistical evidence, tests excluding control and MOO, which are fundamental to placing a contractor inside IR35 – tests such as the business entity ones – are deeply flawed.
Those contractors in the medium and high-risk bands, probably because they are unable to substitute but may well be outside of IR35, must either implement IR35 or provide their public sector client with evidence in a different way. The Treasury’s guidance suggests that contractors use HMRC’s contract review service as an alternative, a route not many contractors are likely to take.
However, if the contractor supplies alternative evidence, such as an IR35 contract review by an IR35 consultancy, who will review this material and pass judgement? The ‘employing’ department? If so, are government departments now supposed to become IR35 experts – a skill that even many senior tax inspectors have failed to master? Should hugely experienced senior interims yield to decisions on IR35 status by civil servants who have had a one-page, heavily biased briefing on the topic?
What happens if a department CEO believes a contractor to be outside IR35 on the basis of a generous contract review by a ‘friendly’ IR35 consultant, and then the contractor is challenged by HMRC? We have the basis for huge ambiguity, complexity and confusion.
But at least the off-payroll rules have some kind of a framework in place. The controlling persons legislation proposal out for consultation simply identifies a controlling person as:
“Someone who has managerial control over a significant proportion of the organisation’s employees and/or control over a significant proportion of the budget of the organisation.”
What’s ‘significant’? What’s ‘managerial control’ in this context? Are there statutory definitions for ‘managerial control’ and ‘significant’? Does either concept have a basis in case law? The consultation even asks whether this is a correct “delineation for a ‘controlling person’”.
That the government itself is not clear on what kind of individuals it plans to target with the rules sets alarm bells ringing.
And unlike the off-payroll rules, this legislation will apply to any contractor deemed to be a controlling person, not just public sector contractors. You could understand the government seeking control over those performing services on its behalf: even the largest of government suppliers with contracts worth billions must maintain certain standards and abide by the government’s rules.
But what place does government have to ban UK-based businesses from using the essential resource that senior interims represent, and risk a huge loss of effectiveness, cost reduction and competitiveness as a result?
There is existing legislation, which is already overly complicated and unworkable, in the form of IR35. The government can already use that to identify disguised employees and make them pay tax like the employees they really are.
What are the benefits of introducing yet more layers of complexity? Complex new rules likely to generate insignificant amounts of additional tax but likely to lead to increased costs and reduced service delivery in the public sector, and reduced competitiveness in the private sector. And all for the sake of what will be one day’s worth of soundbites in the media and a few vaguely positive page-eleven articles in the press.
The off-payroll rules and controlling persons legislation proposals are not only unnecessary, but also unworkable. The government would be better off focusing on effectively implementing the legislation it already has and the ten years of case law, rather than introducing new rules that won’t work.
Let’s hope Cameron, Osborne and Clegg see sense and quickly perform one of their famous U-turns.