WHAT COMPACT?

 

BLOG 211 

WHAT COMPACT?

  

I was fascinated by an exchange on the web the other day.  I subscribe to a website called Nextdoor, which I thought was a local group, but sends me things from miles away so I must have been wrong.  In any event, someone posted an item the other day that strange markings had appeared on the road at the end of my street.  A local Councillor explained that they were creating new Healthy Neighbourhood schemes to stop cars passing through residential roads.  Typical Labour-controlled Brent, I thought trying to thwart the government’s pleas to find alternative ways to get to work other than public transport.  Why no consultation, and what a ridiculous idea, most of my neighbours seem to have thought, until the Councillor came back with the information that it is not a Brent scheme.  It is being financed direct by the government which is forcing councils to implement it immediately.  Typical Conservative government, I thought, one hand not knowing what the other is doing.  Now another Councillor has said it is nothing to do with the government.  It is being imposed on us (and paid for) by the Mayor of London and TFL.  Typical politicians, they disrupt our lives but don’t even know at whose demand they are doing so.

 

But I digress.  Our lives have all been disrupted by Coronavirus, but I have now started going back into the office again.  My local station is on the Metropolitan line and I can get a tube into Aldgate from where I walk to the office.  I am fascinated that coming into town the trains are fairly empty.  People observe social distancing very well; a lot of people will stand rather than sit next to an existing passenger.  Coming back, they are too as far as Finchley Road, about two-thirds of my journey, but at Finchley Road the trains get so crowded that social distancing goes by the board completely.  I think the reason is that at Finchley Road the Metropolitan line has an interchange with the Jubilee line, but before the pandemic I had not noticed a crush there.

 

The thing I do notice is people’s interpretation of wearing a mask.  Some people seem to think it important to cover one’s chin, but dangerous to let the mask cover your mouth or nose.  I noticed a new phenomenon last week.  Some people seem to have learnt that covering your mouth is important as long as you allow the virus to exit your nose.

 

This is not actually what I intended to write about; it’s just letting off steam.  One consequence of staying at home is that I have stopped reading the Evening Standard and  instead on my train journeys am reading the technical articles that I normally save up until I take my annual trip to Chicago (which I will miss this year).  I was reading an article by a tax partner of EY on Off-Payroll working.  The type of clients I deal with are very different to EY.  They tend to deal with the big companies that use the workers, which is what interested me in the article.  What staggered/infuriated me was the author’s comment: “The 30-year growth of the contractor market, and its approach to tax risk, allowed a broad compact among workers, their clients and society to develop.  This is a compact with which most people were comfortable, and which is best defined by the formula: career flexibility + self-employed status + higher daily rate = lower job security + no benefits + no incentive pay.   The Off-Payroll working rules broke this compact by ignoring a profound difference in appetite for tax risk between the parties, effectively allowing the client to impose their approach to risk on the worker without granting the worker any additional rights in return”.

 

I must live in a parallel universe to the author.  In my universe, well over 30 years ago, the big computer companies decided that, whatever the government wanted, they did not want to get involved with PAYE and NIC for computer specialists that they needed only on a relatively temporary basis.  They accordingly told such people that if they wanted to work for them, they would have to form a company and the computer giant would engage that company to provide the worker’s services to it.  Later, other companies saw that a great way to protect themselves against the risk of PAYE and NIC and began to engage workers through personal service companies (PSCs) too.  In 1999, the then government became worried at the loss of NIC and introduced the IR35 rule which treated the PSC as making a deemed salary.  This was a crazy solution as it gave the fee payer, who in most cases was competent to apply PAYE, immunity from doing so and switched the obligation to the PSC.  This created an avalanche of companies that would only engage contractors through a PSC.  Who could blame them?  Unfortunately, in most cases owners of PSC were either incapable of determining whether the IR35 rules applied or gave themselves the benefit of the doubt and concluded that they did not.  HMRC also realised that it was difficult and time-consuming to police IR35 so opted not to deploy the resources to do so.  Off-payroll working was designed to replace IR35.  However, the Chancellor panicked when he realised that Off-payroll working could be very burdensome to small businesses that use sub-contractors and exempted them.  This ended up with a complete mess.  From next April, some engagement of PSCs will be within IR35, some will be within Off-payroll working and some within neither.  The owner of the PSC will still be incapable of applying IR35 correctly and HMRC will still not have the resources to police it.

 

In my universe, there is no compact between client and worker.  The client has said to the worker if you want to work for me, you must do so via a PSC.  The worker has not considered the EY partner’s equation (I will not embarrass him by naming him).  He has considered only a different equation namely work = feed my family.

 

Back in the EY partner’s universe there are a few puzzling problems with his equation.  Firstly, the compact says nothing about either PSCs or IR35 or Off-payroll working.  In the absence of those elements, the compact will still work after 5 April 2021.  Self-employed tax status still gives career flexibility + higher daily rate and still suffers from lower job security + no benefits + no incentive pay.  Off-payroll working changes nothing.  Indeed, it has no application to self-employment at all.  So EY partner can stop worrying.  Can stop worrying, that is, if he really believes his compact.  I suspect though that many of his clients actually adopt a different equation, namely if you are prepared to take off of me the tax risk of my not being able to accurately identify if you are self-employed, I will pay you a greater amount than if I were to engage you (which incidentally I am not prepared to do so it is a case of accepting my deal or not working for me).

 

It is clear from the succession of Tax Tribunal cases, that the BBC put that proposition to its freelance workers.  Many of those would have been very happy to be employed by the BBC, but were not given the option of employment.  Virtually all of them would have been happy to have been taken on by the BBC as a self-employed person but were not given that option either.

 

Many, if not most, nurses and doctors and IT consultants and building industry workers would also be happy to work as a self-employed individual but have been denied the opportunity to do so.

 

It is not a question of who is willing to take the tax risk.  The government opted to require the client, the user of the labour, to take the tax risk.  Pre 1999, most were prepared to go along with this.  In my view, it was the right place to impose the risk because the client is normally a large organisation (or at least a larger one than the PSC) and can afford advice to quantify the tax risk (which does not exist at all if the company does not use contractors) and decide whether that risk is an acceptable price to pay to avoid the onerous obligations that would arise from employing the worker.  Indeed, the concept of tax risk is itself a misnomer.  The risk is actually that the client is either unable to determine whether what the worker will do factually constitutes employment, or is prepared to treat the worker as self-employed in disregard of the facts.  I suspect that in many cases the so-called risk is not even that.  Rather it is that the client is unwilling to apply the law to his employees while the government allows him to shrug off his responsibility on to someone else by engaging such employees through the medium of a PSC.

 

I do not blame companies for doing that.  However, that is pure tax avoidance.  It is not reasonable to seek to disguise tax avoidance by pretending that there is a compact between two parties with equal bargaining power.  That rarely reflects the facts!

 

ROBERT MAAS