The NAO report highlights the difficulties that the BBC had in determining the employment status for tax purposes of the large number of freelance contractors it engaged, as required by new rules for off-payroll working in the public sector which came into force in April 2017. The rules will be applied to the private sector from April 2020, so the BBC's experience will be relevant to the many large and medium sized businesses both as a lesson as to how difficult it can be to apply the new rules and a warning as to what can happen if the implementation goes wrong.
Although April 2020 seems a long way away, for businesses with large numbers of freelancers engaged through PSCs, establishing systems to ensure compliance with the new rules will be a major exercise and planning needs to start now. Many large businesses have become reliant on using PSCs as off-headcount and off-payroll workforce and changing the cultural assumptions will take time.
Current rules and change from April 2020
Currently in the private sector, rules referred to as 'IR35' require that employment taxes be paid by PSCs providing the services of an individual if the individual would have been regarded as an employee of the business if they had not contracted through the PSC. The engager does not have to make decisions about the employment tax status of the individual, and importantly is not liable to pay employer's NICs.
Under the current rules it is the PSC which is liable to decide whether IR35 applies and if necessary to deduct employment taxes and pay employer's NICs. Although HMRC said in a consultation document published in May that non-compliance is widespread and it estimates that only 10% of PSCs that should apply the legislation actually do so, costing £700 million in lost revenues in 2017/18 and estimated to rise to £1.2 billion in 2022/23.
From April 2017 engagers in the public sector became liable to consider the status of their freelancers operating through PSCs and to operate PAYE and pay employers' national insurance contributions at 13.8% if they consider that the individual would have been regarded as an employee of the business if a PSC had not been used.
The government announced in last month's Budget that the rules would be rolled out to the private sector from April 2020, but that they would not apply to small businesses. A consultation paper on the detailed operation of the reforms is to be published in the coming months with draft legislation expected to be published in summer 2019.
The BBC's experience
The NAO report explains how the BBC went about deciding on the status of its freelancers, prior to the introduction of the public sector off-payroll rules.
In March 2017 HMRC launched a new tool called 'Check Employment Status for Tax' (CEST), to help assess employment status for tax purposes. However, the NAO report reveals that when the BBC tested the CEST tool in March 2017, it gave an ‘unable to determine’ result in almost half of 255 cases concerning on-air presenters. The NAO says that the BBC’s view, and that of representative bodies in the media industry, is that CEST’s multi-sectoral approach means that it is not suited to media and broadcasting roles.
The case law tests which determine employment status for tax purposes are complex and nuanced and therefore difficult to distill into an online status tool that will produce the correct answer in all circumstances.
The report says that CEST did not give a concrete answer in many cases because HMRC and the BBC interpreted two of the CEST questions differently, producing different answers. One of the significant concerns with CEST is that it will only produce the correct answer if you answer the question correctly. In our opinion the complexity of the rules means that the person using the tool needs to have a reasonable degree of knowledge about the case law which has given rise to the tests to be able to answer the questions correctly. Further, the test is normally only conducted at the outset of the engagements and does not reflect the reality of how the contractor works. HMRC will stand by the answer that CEST produces - but only if it considers that you have answered the questions correctly.
The report reveals that the BBC did not feel sufficiently confident to rely on CEST until August 2017, following further discussions with and guidance from HMRC. This was some four months after the rules had been introduced.
It seems likely that if CEST does not work well for media and broadcasting roles, there are likely to be other sectors where the tool will not give the correct answer. Businesses need to be looking now at their contractors and ascertaining which roles are likely to be problematic under the new rules and, as the BBC experience shows, CEST on its own is unlikely to produce the right result.
According to the report, to meet its responsibilities under the new rules, the BBC had to update its freelancer booking and payment systems and processes to allow it to record and make the necessary tax and national insurance deductions for the roles that it deemed employed for tax purposes. It did not manage to complete these updates until August 2017; again a number of months after the rules had come into force. It also had to update its guidance and training so that all those involved in the processes were aware of the change in responsibilities and could apply the law correctly.
As the report details, this delay has caused the BBC significant problems with its contractors. Fortunately the private sector rules have a longer lead in time but businesses would do well to use that time to prevent themselves getting into the difficulties experienced by the BBC.
Implementation of the off payroll reforms has affected the BBC’s reputation among its freelance workforce. A number left to work in the private sector but, more significantly where PSCs were initially assessed by HMRC as being employed for tax purposes or 'unable to determine', then after April 2017 the BBC paid HMRC on account of the PAYE and NICs before working out the true position. The process of deciding the actual position and then seeking to recoup the tax from PSCs has been difficult. As a result, the BBC ended up making short-term bridging loans of up to 60% of expected monthly pay to some individuals and made £500 ex‑gratia payments to some lower earning individuals as a contribution towards additional book-keeping fees arising from the changes.
Some individuals have disagreed with the employment status the BBC has reached for them using CEST and in March 2018, a group of more than 170 radio and television presenters wrote an open letter expressing dissatisfaction with how the BBC had handled the changes. Indeed, the BBC has had to set up a mediation process to handle the issues arising.
Businesses with large numbers of freelancers need to consider the financial impact the changes could have on their workforce. HR and payroll teams will also need to factor in employee communications and dealing with questions from possibly disgruntled employees.
According to the NAO, some individuals fear that they are now more likely to be investigated by HMRC because the BBC has started to treat them as employed for tax purposes when they were previously treated as self-employed. According to HMRC, as at October 2018, there were about 100 open investigations into BBC-related PSCs concerning arrears of tax before the April 2017 changes.
In relation to the extension of the rules to the private sector, the government has said that HMRC will not carry out targeted campaigns into previous years when individuals are caught by the off payroll rules for the first time. However, this is likely to still be a concern for individuals using PSCs.
The BBC's experience of dealing with the reforms shows the scale of the task for businesses with large numbers of freelancers and highlights the importance of taking early action to prepare for the change.
Ian Hyde is a tax expert at Pinsent Masons, the law firm behind Out-Law.com