UK tax legislation designed to tackle disguised employment could impact banks which have long used independent contractors for vital tasks such as developing trading platforms and data mining.

Michael Paulin (1)

As fund managers and retail investors alike make sense of a remarkable month – in which the concerted action of the crowd made tulips from stock that was previously regarded as a sure-fire short – there is a sense in which the interest attaching to the regulatory shift that is the off-payroll, or ‘IR35’, rules for the private sector pales in comparison.

The UK Inland Revenue’s March 9, 1999 Budget Press Release was entitled ‘Countering Avoidance in the Provision of Personal Services’ and marked the advent of what became known as the IR35 legislation.

IR35 is tax legislation that is designed to tackle the issue of disguised employment, which is why in later years it has become known as ‘the off-payroll rules’. It was ordinarily the responsibility of the limited company contractor to ensure that they were not operating as a disguised employee.

The extension of Chapter 10 ITEPA 2003 to medium and large private businesses means that responsibility now sits at the door of the contractor’s end-client. The immediate response from some was to prohibit the instruction of self-employed contractors who utilise limited company structures. This was despite the fact that the legitimate tax and administrative efficiencies that are gained by such contractual relationships are in no sense undermined by the legislation, which in reality represents an opportunity for a more structured and consistent approach to compliance.

Banks have long used independent contractors for vital tasks and project work, such as developing and maintaining trading platforms, utilising technology to support investor relationships, and data mining and analysis. All of these contractual relationships are legitimate in principle, and the change in legislation represents the chance to continue to streamline labour and expertise during a period of economic reconstruction.

One must appreciate why it was that several financial institutions considered the new private sector legislation to be a regulatory challenge too far. The regulatory overhang that finance faces is already a significant one. From 2009, the UK Code of Practice on Taxation for Banks has applied, and as a result of changes made by the Finance Act 2014, the code now has legislative force, including the provisions on ‘naming and shaming’ those who promote avoidance schemes.

Banks can continue to utilise the self-employed by ensuring that a legal and technological framework is implemented so those contractors are managed and administered in a compliant and cost-effective way.

While it is true that the private sector off-payroll regime shifts the immediate burden for determining a contractor’s tax status from the contractor to the end-client, the requirement for the client to take ‘reasonable care’ in so doing is not necessarily the burden that some banks appear to have initially considered it to be. The code’s overview section states that the government expects those in the banking sector to “comply with the spirit, as well as the letter, of tax law”.

A structured and corporate approach to the utilisation of self-employed contractors does precisely that. There is no principled reason why financial institutions ought not to regard the new off-payroll legislation as an opportunity – not to dispense with the very necessary services of the self-employed, but rather as a chance to benefit from those services in a way that reduces regulatory risk across the tax compliance dimension.

Yet the economic inefficiencies of creating a PAYE workforce from those who are intermittent self-employed and project-based contractors aside, the other downside to such an approach is the risk banks will then face from non-compliant umbrella companies. Contractors are unlikely to wish to give up the advantages of remaining self-employed, and when legislation creates market disruption there is a tendency for avoidance schemes to emerge. A new risk of utilising former limited company contractors, who now feel pushed into non-compliant umbrella companies, is already emerging.

Banks have deep experience in using technology as a compliance tool. The solution is to interpret the off-payroll private sector legislation as an opportunity: banks can continue to utilise the self-employed by ensuring that a legal and technological framework is implemented so those contractors are managed and administered in a compliant and cost-effective way.

It is an irony of the private sector legislation that tax efficiencies and administrative coherence can in fact be preserved by using insurance-backed legal technology. And while one might infer that HMRC’s intention is to make it less attractive for private companies to use contractors, the reality is that as market volatility continues to surprise as we emerge from the pandemic, banks remain as able as they were previously to utilise the asset of having a flexible and stable self-employed workforce.

Michael Paulin is a barrister at 1 Crown Office Row who specialises in corporate tax.

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