Association of Chartered Certified Accountants (ACCA) – Written Evidence (DFD0098)
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Association of Chartered Certified Accountants (ACCA) – Written evidence (DFD0098) ACCA is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management. ACCA has 219,000 members and 527,000 students in 179 countries, and works to help them to develop successful careers in accounting and business, with the skills required by employers. We work through a network of 110 offices and centres and 7,571 Approved Employers worldwide, who provide high standards of employee learning and development. Through our public interest remit, we promote appropriate regulation of accounting and conduct relevant research to ensure accountancy continues to grow in reputation and influence. The expertise of ACCA members and in-house technical experts allows ACCA to provide informed opinion on a range of financial, regulatory, public sector and business areas, including: taxation (business and personal); small business; pensions; education; and corporate governance and corporate social responsibility. www.accaglobal.com Further information about ACCA’s comments on the matters discussed here can be requested from: www.accaglobal.com Existing measures in the public sector 1. What has been the experience of the new off-payroll rules in the public sector? What lessons have been learned from this experience, and how have they affected the draft Finance Bill proposals? Reports of the initial impact have been mixed. HMRC commissioned research just a few weeks after the initial rollout, which apparently supported HMRC’s predictions that the reforms would cause little disruption. However, other press reports suggested that some government departments lost up to 40% of their IT contractors, with one case (prior to the official rollout) seeing 30 out of 32 contractors leave an MoD contract. In reality, it is too early to be able to form a fully informed view of the impacts of the reforms. Although early figures seemed to show a higher than expected initial revenue yield, these would have been before taking into account the reduced corporation tax receipts which offset the additional receipts from IR35 charges. The enquiry window for companies which have aligned their accounting period to the fiscal year is still open for the first year of operation, and even where enquiries have already been opened they are unlikely to have been settled. Understanding the wider impacts on departments’ productivity and effectiveness would also be valuable in deciding whether the reforms should be deemed a success, but no such review has been published, and it would in any event still be early to have formed a full picture. Impact of new off-payroll rules on organisations 2. Has the impact of the extension of the off-payroll rules to the private sector been adequately assessed? In particular, is the assessment that has been made of the compliance burden (including costs) of these new rules realistic? Has the right balance been struck in the compliance burden on the taxpayer and on HMRC? No; £14.4m divided by the number of affected bodies does not give a realistic figure for implementation of the required changes. The average cost across affected entities comes out a £180, whereas HMRC’s previous research suggested that the costs to public sector organisations were £7,750. While detailed and widespread research into expected costs itn eh private sector is not available, we understand that estimates of between £400,000 and £700,000 have been provided by some larger businesses for the one off system changes, compounded by ongoing compliance and administration costs. As a very rough, and conservative, estimate if we allocate £100k average to FTSE 100 and £50k average to the remaining FTSE 350 businesses we reach costs of £22.5m, with the costs for a further 56,500 large clients, 20,000 agencies and 400,000 contractors left to calculate. The HMRC Impact Assessment does not offer any clear detail as to how the £14.4m figure is allocated between the different affected populations. The balance of burden between taxpayer and HMRC will always be a compromise. Government resources are limited, and it is reasonable that the tax system should be designed so as to reduce the costs to the public purse of policing compliance with the rules. However, HMRC have repeatedly asserted that they consider 90% of those contractors who should operate IR35 fail to do so. Although no breakdown has ever been offered to explain how many are ignorant of the need to apply IR35, how many consider it but incorrectly judge it not to apply, and how many are knowingly avoiding tax, such high levels of default do suggest that something is badly wrong with either the law or its administration. Although the historic method of passing responsibility to the contractor companies disaggregated risk, leaving HMRC with a large potential population of businesses to police, it had the benefit that the only entities that needed to consider or apply the legislation were those to whom it might realistically apply, and which HMRC might be expected to review and if necessary investigate. Business models which were clearly out of scope could ignore the legislation, knowing that HMRC would not in any event waste valuable resource investigating them. The burden on the taxpayer was kept to a minimum, albeit that this depended in part on HMRC exercising their operational discretion only to investigate contractor type arrangements which were clearly within the scope of the anti- avoidance legislations intended reach. By transferring the risk to the far smaller population of end users, HMRC inevitably concentrated that risk. Moreover, the breadth of the legislation, combined with concern about HMRC compliance processes, would drive the risk averse end user to take care to ensure that every potentially affected contract be documented. It is in the nature of larger businesses to have more complex (and expensive) systems processes and policies in place. Although administrative burdens, and in particular the fixed overhead elements of that, are proportionally greater on SMEs than larger businesses, reporting and formal documentation form a far greater part of the large business operation, and will have a greater absolute cost, which is by its nature non-productive. In addition, the wider commercial considerations are different for larger businesses. The reputational risk of being publicly associated with tax avoidance schemes will typically be far more important to a larger business, so they will be more inclined to want greater certainty about their exposure to risk. As part of the assessment of that risk, businesses will need to consider not only the final outcome of any challenge, but also the likelihood of how it will progress, and whether it is likely to become public knowledge. The high proportion of HMRC challenges which fail at Tribunal will be an important factor here. Regardless of its confidence in its own assessments, and of how confident it may be that the Tribunal would agree after a hearing, the risk to the business lies in HMRC taking the case to a public hearing. Regardless of the final outcome, the potential newsworthiness of an initial headline that the business has been accused of facilitating tax avoidance will be the relevant factor, and the apparent likelihood that HMRC will challenge and take to Tribunal cases where the taxpayer has correctly identified IR35 as not applying will significantly increase the business’s perception of risk. 3. Is the exclusion of small organisations sufficiently robust, and how might small organisations gain sufficient assurances that they fall within the exclusion? In addition to the lack of clarity for small businesses, contractors will now have the uncertainty of needing to check that the small business really is small, and operate Ch8 instead of Ch10. Franchise models seem likely to provoke particular issues. In addition the conflicting hierarchies and administrative procedures to cover the interaction of IR35, the MSC provisions, the CIS regime and the Agency Regulations depending upon whether Ch8 or Ch10 applies to an engagement will increase the burden of administration for all along the supply chain. 4. What will be the effect of these new measures on a chain of contractors and subcontractors? The members of the chain will need to be clear where it begins as well as where it ends, with the Fully Contracted Out Services exclusion a likely area of confusion. In addition the need to pass information up and down the chain while remaining compliant with all aspects of the relevant data protection legislation will add costs. 5. What scope might there be for simplifying or otherwise reducing the administrative burden of these measures? What should HMRC do to help businesses understand the new administrative rules? Within the existing legal framework, very little can be done. Although HMRC has framed this as a purely administrative change, it has fundamentally shifted the entire dynamic of payment and cashflows, and in addition has created an aggregated risk in large businesses which they are not prepared to bear. HMRC should continue the education process which was started before Christmas, suspended during the election campaign, and is now running behind its original schedule. Given the importance of encouraging compliant businesses to remain compliant, and of supporting them in their aim to do so, HMRC should be funded so as to effectively discharge that aspect of their role. Determining tax status of workers 6. Are the tests for determining employment for the purposes of these rules sufficiently clear to both engager and worker? Do they reflect the reality of the contracting environment? No, and not really. Employment status is a notoriously complex area, with frequent reference in the case law to the importance of assessing each individual case on its own merits and by reference to all the available evidence, both documentary and actual.