An alternative to IR35 in the private sector – FCSA’s proposal to government

IR35 rules
With the consultation on off-payroll working in the private sector now closed, there is much speculation that an extension of the public-sector IR35 rules to the private sector will be a government shoo-in.

This is in spite of strident resistance from contractor groups amid evidence of the havoc the changes brought to the public sector when they were introduced in 2017.

Now the FCSA, the UK’s leading professional body for contractor services providers, has come up with an innovative solution which it has urged the government to consider.

“A solution that works on all levels”

In its response to the consultation, the FCSA proposes a solution of “Enhanced Reporting and Enforcement” as an alternative to a straight roll-out of the off-payroll IR35 rules to the private sector.

If this was adopted, Personal Service Companies (PSCs) would continue to be responsible for their IR35 status, as they currently are, but they would have an extra obligation of reasonable care.

The proposal would also tighten up compliance with a requirement for end hirers to secure their labour supply chains and for PSCs, fee payers and intermediaries to share information up the supply chain.

Information would be reported quarterly to HMRC, allowing them to make targeted, intelligence-led enforcement activity.

Julia Kermode of the FCSA said:

“Our proposal is a solution that works on all levels: it redresses the current balance by giving both the end-client and PSC some skin in the game; it drives compliance by making it in the commercial interests of intermediaries and the whole supply chain; and it gives HMRC real-time data for targeted enforcement activity. And best of all, our proposal will not be overly burdensome as it is now common practice for compliant businesses in the labour supply chain to carry out supplier audits and maintain preferred supplier lists based on compliance standards.”

Disproving HMRC’s IR35 compliance figures

The FCSA also used its response to present up to date evidence disproving some of the figures flaunted by HMRC in the consultation document. The organisation was able to show that:

HMRC’s assumption that non-compliance in the private sector in 2022/23 will cost £1.2 billion is incorrect
Likewise, the assumption that a third of people working through PSCs in the private sector are disguised employees is incorrect
HMRC’s figure of an extra 58,000 individuals paying income tax per month includes sole-traders.

Julia Kermode slammed the figures as being over inflated and lacking transparency:

“Many of HMRC’s assumptions are simply wrong. We know that the £1.2 billion figure is linked to forecasts published in the OBR’s Fiscal Risks Report, that was issued in July 2017. However, the OBR acknowledged that there were “risks in both directions” in their assumptions, and current evidence clearly points towards the forecasts being overstated. Furthermore, we disagree with HMRC’s assumption that one third of people working through a company are working like employees, but perhaps most concerning of all is our evidence that HMRC’s figure of 58,000 extra individuals paying income tax per month includes sole-traders. This is very serious because, by definition, sole traders are outside the scope of IR35 and so should not be on payroll, nor taxed as employees.”

“All of these figures seem to be over inflated and appear to be used by HMRC and the Treasury to push through legislation outside of the allowable timescale. At the very least, further transparency around the calculations and assumptions is required.”

“Our consultation response also outlines the numerous problems that we have seen since the legislation came into effect in the public sector. The reforms have not been a success and have in fact have been a driving force for significant non-compliance through ever more complex schemes. In the worst instance, contractors have been aggressively targeted and duped into disguised remuneration which now puts them at significant personal financial risk.”

“All in all, the 2017 reforms have been a shambles and the Government cannot realistically countenance any roll out to the private sector. Here at FCSA we have taken a proactive step to propose an innovative solution which is more balanced for all parties and is likely to result in correct IR35 assessments and compliance improvements throughout the supply chain. We are certain that our approach is more proportionate, fair and realistic and we will be lobbying for the Government to listen to our well-informed views.”