Off-payroll is more certain, but we need a Taxpayers Fairness Act - online calculators

Off-payroll is more certain, but we need a Taxpayers Fairness Act

The so-called “IR35 reforms” (off-payroll working – Chapter 10 ITEPA 2003) have caused earthquakes in the flexible workforce that continue to weaken the UK economy. So says Dave Chaplin of IR35 Shield in this article for ContractorCalculator.

There have been many reports of firms banning the use of limited company contractors. One example was reported publicly in May 2022 when English television presenter and journalist Anne Robinson quit presenting the TV gameshow Countdown because Channel 4 wanted her to “go PAYE” and put her on their payroll. Somewhat odd behaviour, considering Anne Robinson has been her own boss for decades.

Anne told The Sun newspaper: “I come from a long line of alcoholic, Irish bandits so to suggest I go PAYE is a bit like asking Philip Green or Richard Branson to join the company payroll. I wasn’t interested in any offer on that basis. Even if it included financial parity.”

So, what’s been going on, and why?

M&A off-payroll tax risk?

At the time of the Countdown report, privatisation of Channel 4 was on the horizon, and perhaps the Government were wary of encountering potential buyers asking how much off-payroll tax risk they had on their balance sheet and therefore sought to minimise that risk as they groomed for sale.

Due diligence operators in the mergers and acquisitions market are familiar with a firm’s potential liability to off-payroll tax risk. It is now a standard topic for buyers and sellers to cover. Multiple factors are driving this detailed scrutiny. These include:

  • Flaw: the lack of a tax offsets provision, which the Treasury recently indicated they are still working on.
  • Risk: moral hazard was also generated after HMRC’s “soft landing” promise in February 2020, which some firms misconstrued as meaning there would be no tax liability in the first year.
  • CEST: problems with HMRC’s Check Employment Status for Tax (CEST) tool, which gave many firms a false sense of security – despite having no statutory authority and just being a guide, many firms believed it afforded them protection in law – it doesn’t.
  • Forever litigation: firms fear being the next victim to be pushed onto the tax tribunal merry-go-round, like Atholl House Productions Limited (see Telegraph reporting), facing a fourth visit to a tax tribunal.

However, despite the apparent gloom, firms that implement robust regimes should be able to take comfort from the binding legal principles clarified by the Court of Appeal on 26th April 2022.

Atholl House – more certainty and clarity

When Atholl House had its appeal upheld by the First-tier tax tribunal, the decision was based on solid case law principles, essentially correct in law, but contrary to the long-term desired policy view of HMRC. Atholl defended the decision at the Upper-tier tribunal, and then HMRC appealed to the Court of Appeal.

The substance of HMRC’s appeal, the first ground, sought to radically narrow the case law so that the status determination about a specific engagement should not have to consider other engagements throughout an individual’s entire career. The critical status factor here is the being in business on own account (“IBOOA”) factor.

HMRC tried to argue that treating someone’s status over their entire career as a relevant factor placed an unduly onerous compliance burden on HMRC and an onerous burden on organisations or businesses engaging others to provide work. But, HMRC did not convince the tribunal, which stated that contracts should not be construed in a vacuum but in the light of the admissible factual matrix. The tribunal said it would be myopic to ignore the fact a person who provided work had an established career as a freelance.

The Court of Appeal clarified many further aspects of correctly applying the case law, thereby closing down HMRC’s ambitious attempt at narrowing the case law to align with their preferred policy view. Whilst some errors of law were found, which resulted in the case going back to a lower court, the overall decision was a disaster for HMRC.

Contractual certainty arrives

Firms can take considerable comfort from the Court of Appeal’s clarity on the correct application of the Supreme Court decision in Autoclenz Ltd v Belcher [2011] UKSC 41 regarding tax cases and IR35. That case, along with Uber BV v Aslam [2021] UKSC 5, enables courts to take a purposiveness approach to Worker status cases and seek the “true agreement” between the parties, effectively side-stepping expressed terms where there is an imbalance of bargaining power.

Historically, Autoclenz created tax uncertainty, with parties concerned that their carefully drafted terms may not hold weight in IR35 tax cases. We now know that’s no longer true. The commercial contract is still the starting point when considering status (see White v Troutbeck [2013] EWCA Civ 1171 – Para 43). The contract is still king, and expressed terms cannot be cherry-picked by either party during the contractual interpretation and subsequent construction of the hypothetical contract in IR35 cases.

Because of the Court of Appeal decision in Atholl House, the off-payroll earthquake tremors should have subsided.

The offsets problem

The new legislation puts the onus of tax status determinations and the entire tax liability on companies where the contractor is operating via their own limited company. But, unlike the original IR35 rules, there is no automatic offsetting mechanism in the legislation whereby the taxes already paid by the contractor can be used to offset the tax bill due by the hiring company.

This unusual fact was confirmed by the National Audit Office (NAO) and HMRC in February 2022. The Public Accounts Committee quizzed HMRC on 21st February 2022, who confirmed the position:

“We do not have any legislative capacity to set off the amount paid by the personal service company or the contractor, so we collect the full amount from the public sector body. What then happens is that the individual contractor and their personal service company can make a claim for repayment.”

Suppose HMRC successfully overturns an “Outside IR35” determination. In that case, they will seek to recover both sets of National Insurance Contributions and Income Tax from the client with no offsets, and the contractor gets a full tax refund and pays no tax.

This structural issue is wrong, and firms can take comfort that HMRC and Treasury are working on the issue, as revealed in the Treasury Minutes report from 5th December 2022.

CEST – false sense of security

There are widely reported concerns about HMRC’s Check Employment Status for Tax (CEST) tool, the most common being its over-reliance on the case law factor of substitution. Worse, though, is that it was built upon the foundation of HMRC’s narrow policy view of status, which was shown to be wrong by the Court of Appeal. The flaws in CEST were explained objectively in IR35 Shield’s CEST Webinar in June 2022.

For now, CEST is broken, and we are left with a tool that does not align with the law but is considered the stated policy view by HMRC. This disparity is not welcome by businesses, which the CBI highlighted to the House of Lords Economic Affairs Finance Bill Sub-committee, whose letter to the Financial Secretary to the Treasury quoted the CBI as saying: “businesses are left in the position where they are told if they take this to court they will get one outcome, but HMRC is saying that it can rely on another outcome.”

When conducting status enquiries, HMRC status inspectors must follow the guidance set by their seniors and have the power to form an opinion that tax is due. When legal arguments are presented with reference to case law, these arguments tend to fall on deaf ears. CEST generates considerable problems at this juncture because inspectors are relying on it.

The existence of CEST is a bit like the police creating an online tool called “Check All Crimes (CAC)” and then arresting people based on its results rather than by reference to criminal law. That is not fair.

What needs to change?

In a democratic nation, where the rule of law applies, tax authorities must be subject to robust checks, balances and transparency in tax administration. I believe it’s time for the tax authorities to split into two so that tax collection and prosecution are under separate, independent bodies.

Further, where principles of tax law are unclear or in a dispute over interpretation, the Government should fully fund recourse to the courts for determination. We should not rely on a woman who presents a daytime celebrity chat show to provide the funding to help shape our tax laws.

Perhaps we can learn lessons from America, where they have a Taxpayer Bill of Rights, and a Taxpayer Advocate, who assists taxpayers in situations where the tax authorities have overreached.

I say it’s time for our own Taxpayers’ First Act. Watch this space.

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