The impacts or “side effects” of Off-payroll legislation and private sector IR35 reform on the flexible labour market have been unravelling fast since April, as The Freelance Informer has previously reported. Yet, there seems to be an absence of urgency coming from the Treasury and HMRC over evidence-based developments, it was revealed in a Finance Bill Sub-Committee session on Monday 13th December.
- IR35 Reform and Off-Payroll hiring practices have led to a spike in the number of unregulated umbrella companies launched since March 2021 and the number of contractors forced to join them, smacking of another loan charge crisis.
- Brain drain: British highly skilled talent compelled to move overseas to more contractor-friendly markets
- There’s been a deep dive in take-home pay for contractors forced to go through umbrella companies, which according to industry experts and the Trades Union Congress (TUC) are being used to diminish workers’ rights and misappropriate billions of pounds in unpaid wages and tax fraud (Guardian).
Earlier this week members of the Treasury and HMRC were led by Lucy Frazer, Financial Secretary to the Treasury, in a Finance Bill Sub-Committee to discuss Off-Payroll legislation, the effectiveness of CEST and the progress of a call for evidence about unfair practices surrounding the umbrella company industry.
It was revealed in the meeting that despite a report coming out next year, a legislative body set up for single enforcement of umbrella companies may not see the light of day for some time, perhaps even years. The body would have to be passed as part of an employment bill, which would be dependent on what Parliamentary time allows. Therefore, no date has been targeted.
Comparing apples to oranges
The Financial Secretary has a tough job ahead of her. Not only is she getting up to speed on the Treasury’s coffers post-pandemic she must simultaneously ensure that Treasury-initiated legislation is not counterproductive to its task in generating tax revenues. She must also be aware that what the economy needs most is a buoyant flexible labour market that embraces entrepreneurialism and highly skilled talent.
Dave Chaplin, CEO of compliance solution IR35 Shield, commented on how Frazer handled the tough questions posed to her in the session.
“The new Financial Secretary to the Treasury seemed in defensive mode as she responded to intelligent questions from the Lords,” said Chaplin.
“The rules have punished the UK’s flexible workforce and, in turn, have harmed UK plc and the economy as a whole,” he said without reservation.
Chaplin noted that the Lords seemed “in tune with the evidence” highlighting the damaging effects of the measures.
“In contrast,” Chaplin said, “the Treasury and HMRC appeared somewhat oblivious – despite the reforms being in place for almost nine months, they kept referring to irrelevant research data from the public sector.”
Chaplin described the repeated referral to public sector reform as “either laziness or deliberate obfuscation”.
He believed that it might be a tactic to possibly “downplay the plethora of evidence from sources that the reforms have had a harmful effect on the economy and that firms have chosen not to engage with UK freelancers. The public sector was an entirely different beast, and she’s not comparing apples with apples.”
Chaplin also comments on the claimed “success” in the public sector, based on increased receipts, which in his eyes was largely due to the public sector also implementing blanket policy decisions, resulting in rates skyrocketing, because contractors fled to the private sector.
“The public sector paid more, for the same skills, and got a rebate back from the increased taxes. The private sector doesn’t have that luxury. Instead, many moved work offshore, or cancelled projects,” said Chaplin.
According to IR35 Shield’s IR35 Impact Survey, the Off-payroll legislation that took effect in the private sector earlier this year has had a significant and damaging impact on contractors and the firms that rely on their talent.
IR35 Shield’s survey of 3,750 contractors sought to understand firms’ behaviour leading up to April 2021 and how the market has reshaped itself. The results have indicated that whilst firms were attempting to recover from the pressure of a global pandemic, the new legislation created an additional and unwanted hurdle, according to the former IT contractor and IR35 specialist.
Key findings revealed:
- 47% of respondents said that firms chose to impose blanket bans.
- 58% claimed firms moved “most” or “some” of their work out of the UK.
- 50% believed firms would have some long-term damage.
- 46% said firms seeking to retain contractors needed to pay more.
- 65% of firms lost at least half their contractors.
- 35% of firms cancelled projects.
Treasury-initiated actions: should they have consequences?
A cart before the horse analogy was used more than once by some of the Lords in reference to the uptick in newly launched umbrella companies, which was in direct correlation to the Off-Payroll rules set in motion in April of this year, which smacks of another loan charge crisis.
This was concerning for some of the Lords aware of an IR35Shield survey, which found that 74% of contractors surveyed said that they could not tell if an umbrella company was “compliant” and therefore left vulnerable to tax avoidance schemes.
Last week, The Financial Times reported that Phil Pluck, chief executive of the Freelancer and Contractor Services Association, which accredits compliant umbrella companies, rather than represent freelancers or contractors despite its name, said at a House of Lords economics affairs committee:
“IR35 [reforms] have forced a lot of people into umbrella employment and therefore they’re not necessarily as educated [about the market] as they could or should be. We’ve seen very clear evidence it’s driven up tax avoidance.”
The Lords also questioned whether the Treasury or HMRC wanted to respond to reports that highly skilled contractors had left the UK due to the Off-Payroll rules, effectively a “brain drain” on the UK’s ability to retain highly skilled British talent.
Frazer felt she could not respond to such accounts without evidence of such cases and on a notable scale.
Chaplin said in response to talent and projects leaving UK shores:
“With its many legislative flaws, the botched legislation left many firms no option but to clear out its contracting workforce by implementing blanket bans. Moreover, 48% of contractors told us that firms moved some of their projects offshore – unnecessarily benching UK workers [which] may not have been what the Treasury had in mind to increase the tax take. Harming the flexible workforce in such a drastic manner will mean everyone misses out – including the Treasury.”
Call for contractor evidence
When Lucy Frazer was asked whether she felt that the “fairness” with which HMRC’s IR35 tax reform and its CEST tool were predicated was extended to contractors when it came to contractor rights and commensurate employee benefits enjoyed by salaried employees, she sidestepped a direct yes or no response. She instead referred to the Treasury’s call for evidence still being in progress.
She did say, however, irrevocably that any practice whereby the contractor was effectively footing an employer’s national insurance bill was “illegal”. This reported industry practice seemed a new concept to the Financial Secretary.
It’s no wonder that contractors can get confused over such practices to this day and how employer or umbrella company national insurance costs are factored into their rate.
Frazer said if there was evidence of contractors paying for an employer’s national insurance contributions, she would be very interested in receiving it. Such information would prove crucial to the evidence-based IR35 reform impact and umbrella company practices reports being compiled and set to be published sometime next year.
However, when asked what action the Treasury would take if such evidence was revealed, she said that it was not the responsibility of the HMRC or the Treasury to get involved in wage-related matters in commercial situations.
The thing is, if contractors fail to provide evidence of unfair practices, then HMRC can potentially turn their cheek and wash their hands of the reform’s negative impact on the flexible labour market. Especially if it means the reforms prove to create more problems and fewer taxes for the UK economy than previously hoped.
Rather than to solely post your experiences on say LinkedIn, get in touch with a Member on the Finance Bill Sub-Committee and take the necessary steps to show evidence.
Little incentive for HMRC to pull the plug on umbrella companies
Seb Maley, CEO of IR35 insurance specialist Qdos, noted in a previous Freelance Informer report, that the government expects to raise £3.8bn by 2026 through IR35 reform. But are these assumptions based on contractors being fairly or unfairly placed inside IR35?
Maley said that for HMRC to assume that IR35 reform has impacted only 180,000 contractors seems way off the mark, particularly when the government has previously said 500,000 people work through umbrella companies – a way of working inextricably linked to contracting and IR35.
“HMRC still somehow claims that CEST is capable and aligned with case law. Again, it isn’t. The tool hasn’t been able to determine a contractor’s IR35 status well over 200,000 times in the past year or so. What’s more, and despite this evidence, making light of it, HMRC has no obligation to stand by an IR35 decision based on CEST,” said Maley.
Qdos research completed by over 1200 contractors showed:
- IR35 reform (62%) is seen as the biggest threat to contracting in 2022, above new tax changes in April (18%), Covid-19 and Brexit (both 6%).
- Most contractors also feel that IR35 will continue to impact them in 2022, with (51%) not of the view that the situation will improve.
- On average, contractors rate CEST (HMRC’s IR35 tool) as 2/10, with just 14% happy to work with a business that uses the tool.
CEST is oversimplified, misaligned
A recent IR35 Impact survey conducted by IR35 Shield also showed that firms struggled to cope against the backdrop of the pandemic and suffered harm due to the new Off-payroll rules.
“They were wrong-footed by an ill-prepared government hell-bent on its drive towards so-called tax fairness,” said Chaplin.
However, Chaplin saw some light at the end of the tunnel regarding the widely criticised CEST tool:
“It was pleasing to finally hear HMRC admit that they had purposefully chosen not to include all the case law relating to mutuality of obligation into CEST. CEST’s misalignment with this area of law is a longstanding charge, and HMRC appears to have finally admitted defeat.”