Employment intermediaries tax institute proposes new approach to tackle non-compliance
The Chartered Institute of Taxation (CIOT) has suggested a new approach to tackle those who are ignoring or manipulating IR35 rules so they can avoid tax payments to HMRC.
IR351 is the income tax and National Insurance Contributions (NICs) legislation that may apply if someone is working for an organisation through an intermediary, typically a Personal Service Company (PSC). There are many legitimate reasons to work through and engage someone via a PSC. However, it can also be used to reduce tax and NIC where, without the PSC, the worker would be treated as employed, rather than self-employed, if he or she was working directly for the organisation concerned.
It is estimated by the Government that non-compliance with IR35 this financial year will cost the Exchequer around £430m in lost tax and NICs2.
Colin Ben-Nathan, chairman of the CIOTs employment taxes sub-committee, said:
“It is clearly wrong that some people get away without paying the correct amount of tax and NICs because they are playing fast and loose with IR35 either through ignorance of the rules or deliberate non-compliance.
“In our view HMRC needs to give greater publicity to their successes in IR35 cases to increase awareness of the rules and where they suspect outright evasion then clearly they should come down hard on those involved.”
HMRC has suggested transferring the IR35 compliance obligation from the worker and his/her PSC to the organisation that they are physically working for. However the CIOT does not think this will simplify administration or reduce non-compliance. Instead the organisations that these workers are physically working for will simply err on the side of caution and deduct tax and NICs leaving it to the worker and HMRC to sort out the mess.
HMRC has also suggested replacing the existing IR35 test with a supervision, direction or control test. CIOTs view is that this is unlikely to increase compliance and the underlying danger with a broad brush IR35 test is that it would catch many who are genuinely in business for themselves and who would currently pass the hypothetical employment test.
The CIOT believes a better option would be to impose an annual reporting obligation on organisations that are engaging with these workers, based on the PSC notifying them whether or not it considers that IR35 applies. There should also be an obligation for the PSC to notify that organisation that it is committed to applying IR35.
Under the CIOTs proposed approach the organisation would then report what it had been told by the PSC and whether or not it was in agreement. If the organisation was to wilfully mislead HMRC that IR35 does not apply, when in fact it did, then any debt owed by the PSC in relation to non-compliance with IR35 would fall back to the organisation concerned.
Colin added:
“We strongly recommend that the annual reporting option we propose is seriously explored by HMRC rather than imposing an obligation on businesses to account for tax and NICs at source on payments to PSCs as put forward in the discussion document.”
