In this series of videos Ian Hyde, the head of our tax disputes team, talks to Adrian Lifely about the tax compliance burdens HMRC have put on large businesses to police the gig economy. In their third video, Ian and Adrian take a look at off payroll workers and the reforms of IR35.
Read the transcript.
Watch the full series:
AL: Hello my name is Adrian Lifely, I am a Disputes and Risk partner at the Law Firm Osborne Clarke. This video is the third video in the series looking at large business being used as HMRC's policeman, especially to catch tax evaders in the gig economy. In this video, we are going to be discussing what's called IR35, which affects personal service companies, you might have come across this Tax issue in relation to the BBC news reader dispute. I am with Ian Hyde who is Osborne Clarke's head of Tax Disputes, welcome again Ian. Can you tell us about this problem that the BBC had with IR35 please?
IH: Yes, the BBC is perhaps the most well-known example of this, but there have been quite a few in recent years. If I can go back a few steps on this. There has always been a tax difference between self-employed and employed, and that creates a tension that has always been there, around National Insurance and other issues. There is an incentive for individuals if they want to achieve tax advantages to put them self through a personal service company and be a consultant to a business, rather than employee. That is what happened in the BBC and that’s where we have these current issues around IR35. Obviously with the gig economy and the increase in flexible work forces the concerns have increased about this differential and the use of these personal services companies to try and reduce tax bills. IR35 has actually been around since 1999, and that’s what the BBC case was about where the test is, if you ignored the use of the personal service company would the individual, the news reader, be regarded as an employee for Tax purposes of the BBC or whoever the main, the large business is, and so if the revenue can establish they would be employed then you tax them effectively as if they are employed. So it's an anti-avoidance rule to stop use of these personal service companies.
AL: Understood. And do the consultants in this situation, do they acquire employment rights? You say they are treated, you look at it as if they are an employee of the employer and ignore the PSC, does that result in employment?
IH: No they don’t actually it’s a fiction. It’s a tax fiction this test IR35, so it doesn’t have any impact on employment rights, it just creates a tax test to look at avoidance basically.
AL: So, what do you recommend that your client should do about this? What are you saying to general counsel for example about this new law that is coming in?
IH: Well the change is actually quite significant. There are some changes coming in April 2020 which is that the test itself of IR35 is not changing so how you work out whether somebody is a deemed employee or not isn't changing. What is changing is that the responsibility for paying the tax that follows is going to shift from the personal service company, from the individual into the employer, into the large corporate. So suddenly large corporates are going to have to pay the tax for all there IT contractors, are all there apparently self-employed off payroll workers, if they are found to fail IR35. Now, this has been brought into public sector already, brought in, in 2017, but from April 2020 large corporates will be hit by this. And the reason for it, is that the revenue have found it very difficult to chase individual contractors, because under the current rules the revenue have to go after each contractor. Which is proving very, very difficult and the estimate from the Revenue is some 1.2 billion of tax a year, is going to be lost unless they do something about it. So, again as we were discussing in the other videos, this is about the Revenue pushing the burden on large business, because they are finding it difficult to find these contractors who are off radar effectively for the Revenue. So the responsibility will be on the large business to make sure that they are determining the tax status of these individuals, like corporates. And if they get it wrong they end up paying the tax. So it creates a real dilemma for large corporates and they need to decide their strategy before April 2020. Are they going to take a cautious approach and assume that large numbers of these personal service companies are in IR35, so they will deduct tax at source effectively, like a PAYE, or are they going to be relaxed and just pay gross. In which case if the Revue come after the corporate then the corporate has a problem.
AL: So, I suppose for the corporate on the one hand, the temptation is to play it safe and to not to pay gross, but on the other hand they may end up paying more to contractors who will want to pass on that cost of the extra tax back to the large corporates.
IH: Yes, it will be, the various conversations I'm having with large corporates are around that combination of tax risk versus, how you going, are you going to gross up the PAYE for these contractors who are going to effectively suffer a pay cut, are these contractors going to go elsewhere to more relaxed corporate employers, so you will lose talent. So there is a balance to be struck there, which I think for general counsel and others, I think it's not just a tax issue, I think general counsel and HR Directors really need to get involved in this internal debate, as to how they are going to set their strategy.
AL: And do you have a sense of, you mentioned global figure for the amount of tax that has been lost, do you have a sense there how much this might mean for individual large corporates, how much money is at stake for some of our very large clients?
IH: A lot, I mean it’s a very big tax risk. Large corporates are really concerned about this, it will have a big effect. If you got a thousand contractors ever year, your tax cost could be in millions from this, and indeed a lot of the large banks are now making global decisions, effectively blanket decisions that the will not engage anybody on IR35 terms. So they will not, they will require people to come on payroll or to be remunerated to alternative structures, so they are taking it very cautious approach, which has a knock on effect, but they are clearly deciding tax risk in the way we talked about it in the first video, that inclination to be cooperative is really playing out as a cautious approach to this issue.
AL: So, there is a lot of work to be done now by large corporates in the private sector between now and April next year to get ready for this.
IH: Yes. And there are a lot of internal discussions to be had and the new rules in April will apply to payments made after April, so any contractor who is now being taken on the books, 6 months ahead may well have payments that are in the new rules.
AL: So it's already an issue, well thank you very much Ian that’s most interesting.