The Chartered Institute of Taxation (CIOT) has come forward with an alternative to HMRC’s plan to reform off-payroll working rules (IR35) in the private sector.

The UK tax body believes that instead of extending the disastrous rules from the public sector into the private sector, businesses could help to ensure tax compliance through regular reporting. This would involve sending regular reports of payments made to contractors who set up and work through their own PSCs. They could also provide their view of whether the Personal Service Company should be applying IR35.

Question PSCs on case-by-case basis

This approach, CIOT said, would enable HMRC to follow up directly with the PSC to check whether they have applied IR35 to an engagement. CIOT believes that this would help to avoid repeating mistakes with last year’s roll out in the public sector. It would also help HMRC to curb non-compliance with IR35 tax rules.

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“CIOT suggests an alternative approach whereby businesses e-file a report of payments made to PSCs, and their view of whether the PSC should be applying IR35, to HMRC on a regular basis,” John Cullinane, CIOT tax policy director, said. “By also expanding existing questions on PSCs on workers’ tax returns this would enable HMRC to follow up directly with the PSC to check up on whether the PSC has applied IR35 to an engagement.”

Higher penalties for non-compliance

The CIOT suggest that where a PSC deliberately fails to apply IR35, it could face a significantly increased penalty for non-compliance. This would include shifting liability for PAYE/NICs to the contractor. CIOT feel that this would focus the contractor and ensure sufficient attention is paid to IR35 compliance.

“Our alternative approach could prove a much less administratively burdensome and more cost-effective approach to tackling non-compliance than adopting the public sector rules,” Cullinane said.

Blanket approach doesn’t work

According to CIOT, many public sector bodies are now automatically applying IR35 rules to contractors working through their own PSCs. This is often without assessing whether those rules should be applied on a contract-by-contract basis.

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The accuracy of HMRC’s Check Employment Status for Tax (CEST) tool has served to make the situation worse. As has been widely publicised, CEST has come under fire for omitting key considerations such as mutuality of obligation. 

“The ultimate aim must be to align the tax treatment of all off-payroll engagements, whether in the public sector or the private sector. This does not automatically mean that the right answer is simply to roll out these relatively new public sector rules to the private sector,” Cullinane said.

“Instead of the planned extension, we suggest retaining the existing IR35 rules. However, we recommend increasing the penalties for non-compliance. And making the worker jointly liable for PAYE/NICs debts. This ensures HMRC has all the information needed to tackle those that ignore the IR35 rules. Further, this will mean that individuals will be rather more focused on paying the right amount of tax, at much less cost in time and resources for HMRC.”

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