367: National Audit Office (NAO) and Economic Affairs Finance Bill Sub-committee’s recommendations for improvement to off-payroll working regime

This report highlights a number of practical issues with the off-payroll working rules.

A year on from the introduction of the off-payroll working rules to bring the private sector in line with the public sector, the National Audit Office (NAO) and the Economic Affairs Finance Bill Sub-Committee have published reports on reforms and recommendations for improvement. The NAO focuses mainly on the public sector, whilst the Sub-committee focuses on the private sector roll-out. Key points to note include:

• both reports highlight the limitations of the Check Employment Status for Tax (CEST) tool and guidance and recommend that HMRC make improvements. Although HMRC updated CEST in 2019, it still produces an ‘unable to determine’ outcome in around 20% of cases;
• the extension of off-payroll working rules to the private sector has resulted in increased use of rogue umbrella companies associated with tax avoidance. This often results in lower income workers receiving 20% less pay as the arrangement makes them responsible for employers’ NI contributions. The Sub-committee is critical of the lack of progress on regulating umbrella companies and recommends bringing forward proposals for the single enforcement body;
• the Sub-committee also criticises the narrow focus of off-payroll reforms on tax issues rather than the wider issue of employment status. It points out the unfairness of treating individuals as employees for tax purposes without giving them the rights normally associated with employment. To address this, the Sub-committee recommends defining employment consistently and decisively for the purpose of both tax and employment rights, as set out in the Taylor Review;
• the NAO highlights the lack of a clear legal mechanism for workers to dispute a tax status determination made by the relevant end user, other than with the client organisation or using HMRC’s self-assessment and NI contributions reclaim routes; and
• public sector reforms have reduced non-compliance and increased tax revenue, although public sector compliance has not been challenged in court. However, there is uncertainty surrounding HMRC’s approach to non-compliance in the private sector, where there is greater risk due to its overall size and complex supply chains. The NAO recommends a more effective and efficient compliance system to ensure that HMRC can collect all taxes due in full.