Off Payroll Working in the Public Sector Channel 4 response

Off Payroll Working in the Public Sector Channel 4 response Executive summary Channel 4 has a unique status as a publicly-owned, commercially-funded, not for profit, public service broadcaster. Its unique hybrid model means that unlike the other commercially-funded public service broadcasters, Channel 4 is not shareholder-owned; nor is it publicly-funded it generates all of its revenue from the commercial sector, and these are the means by which it fulfils its public service remit. As a result of its not-for-profit status, Channel 4 reinvests nearly 500m a year back into the UK creative sector, generating 1.1bn in Gross Value Added (GVA) per year and underpinning 19,000 jobs. Channel 4 recognises the challenges that HMRC faces in enforcing the IR35 rules, and that significant levels of non-compliance are expected under the current regime. In financial matters, such as the issue of tax compliance, clarity, consistency and certainty are vital for a system to operate effectively. Channel 4 believes strongly that all public and private bodies should play their part with HMRC in collectively tackling this issue. However we are concerned that the current scope of the proposals would not be effective in delivering to the Government s aims of ensuring a simple and effective compliance regime while avoiding increased costs for business. In particular, the proposed scope of the new rules does not take into account the unique status of bodies such as Channel 4 and the characteristics of the sector in which it operates. Channel 4 has to compete directly with the private sector for all of its funding, and these new rules would place it at a commercial disadvantage in a competitive marketplace. We are also concerned that overlaying the new set of rules, as currently framed and applying only to some broadcasters, would result in unintended consequences and create a two tier tax regime. For example, by disregarding some of the standard employment status tests, the new rules will introduce disparities into the tax framework, and will broaden the scope of employment. Furthermore, the new tests would produce outcomes in the TV sector that are inconsistent with longestablished HMRC guidance. In addition, there are also various practical issues with implementing the new rules, and there would be a very narrow window for the affected organisations to build IT solutions, train staff and communicate with suppliers. Channel 4 strongly believes that any changes made to the IR35 rules should not apply to one part of the broadcasting sector alone. For a new IR35 regime to be effective, consistent and maintain a level playing field, any changes should either apply across the whole of the creative industries sector or should exclude organisations such as Channel 4, which operate in the commercial marketplace. We recognise and support the spirit of what the Government is trying to achieve with the new rules. There may be other less problematic approaches to ensuring compliance with IR35 that are as effective and could be applied across the TV industry, while minimising the burdens on business that HMRC noted as a concern in the consultation document, such as provision of detailed data to HMRC to aid compliance or strengthening this requirement in contractual obligations. We would be happy to explore these options further with HMRC. 1

Introduction Channel 4 is a publicly-owned, commercially-funded, not for profit, public service broadcaster, with a statutory remit to deliver high quality, innovative, experimental and distinctive content across a range of platforms. Channel 4 has a unique hybrid model: unlike the other commercially-funded public service broadcasters, Channel 4 is not shareholder-owned; nor is it publicly-funded it generates all of its revenue from the commercial sector, and these are the means by which it fulfils its public service remit. In addition, Channel 4 s not-for-profit status ensures that the maximum amount of its revenues can be reinvested in the delivery of its public service remit. Channel 4 is the only broadcaster that commissions all of its programmes from external production companies. This means that every penny Channel 4 spends on making programmes is invested back into the creative economy, and ensures its focus is on supporting production companies from across the UK. This investment of nearly 500m a year generates 1.1bn in GVA each year and supports 19,000 jobs across the UK 1. Channel 4 welcomes the opportunity to respond to HMRC s consultation on the IR35 rules. As a publicly-owned corporation, and as a public-service broadcaster, Channel 4 takes its tax responsibilities very seriously. We acknowledge that HMRC faces various challenges in enforcing the intermediaries legislation in its current form. We agree with the overarching objective of strengthening tax compliance in this area, and will support HMRC in its efforts to make the current system more effective. However, we have significant concerns about the principles and the practical consequences of the new rules under consultation, as well as concerns around their technical implementation. We set out below our thoughts on the issues raised by HMRC in the consultation document. Throughout this response: We use the term current rules to refer to the intermediaries legislation (ITEPA 2003 Part 2 Chapter 8 and SSCBA 1992 s4a); We use the term new rules to refer to the proposed regime as set out in the consultation document; We use the term PSC to cover the various types of intermediary to which the new and current rules apply; and We use the term engagers to refer to companies/public bodies engaging contractors Scope of the new rules We note that HMRC proposes to apply the new rules to a defined group of public sector bodies based on the Freedom of Information Act 2000. We have significant concerns about applying the scope of the new rules in this way, as it does not take into account the plurality of models captured under the proposed definition of the public sector, nor the particular context in which Channel 4 operates. HMRC state that the new rules would not apply to private sector companies carrying out public functions, or private sector companies more widely, due to concerns about increased administrative burden on business, increasing costs, and that it would likely result in over-compliance as risk-averse businesses seek to minimise any risk, or perception of risk, concerning their tax liabilities. These concerns would apply equally within the public sector, and in particular to commercial businesses that are publicly-owned. It was apparent from the July 2015 discussion document that the Government s intention was to move the responsibility for applying the IR35 rules onto all engagers of PSCs and not simply public 1 Oxford Economics report for Channel 4 2014. These employment figures include those employed directly by Channel 4 itself; jobs supported in Channel 4 s supply chain (across all sectors); and jobs created by the impact of staff spending their wages on UK-produced goods and services, both those working for Channel 4 itself and those employed in its supply chain. (GVA contribution and jobs supported) 2

sector bodies. Introducing these new rules for one part of the economy alone would create a two-tier regime for employment status which would be inconsistent with the Government s stated aim of simplifying the tax system in the UK. Focussing only on one part of the economy also creates the risk that under the new rules many PSCs will simply opt not to work for public bodies and then continue applying the IR35 rules (or failing to apply them, as the case may be) in the same way as they have done previously. Applicability for Channel 4 There are a number of important considerations which we believe should exclude Channel 4 from the definition of the public sector for these purposes. The proposed definition does not take account of the important principles applied to date in legislation and by successive Governments and Parliaments to maintain Channel 4 s operational and editorial independence. It is vital that this independence is maintained. There are a number of examples where public policy has recognised the particular characteristics of Channel 4 as a commercially-funded public service broadcaster in public ownership, and where exceptions have been made to take account of the need to balance Channel 4 s role and status with the achievement of policy objectives. The Freedom of Information Act 2000 recognises Channel 4 s independence and exempts a number of Channel 4 functions concerning, relating to, or closely associated with Channel 4's creative output from the legislation. Later legislation, such as The Equality Act 2010 and The Public Bodies Act 2011, applies more targeted definitions of the public sector in order to recognise Channel 4 s status, whilst the Senior Accounting Officer regime for large businesses excludes public bodies but does apply to Channel 4. Furthermore, while Channel 4 is publicly owned, as a fully commercially-funded public service broadcaster, Channel 4 has a unique status and operates in a more distinctive context than other publicly-owned bodies. Channel 4 does not receive public funds and generates its revenues in the commercial marketplace, competing directly with private sector companies and funding its activities on a self-sufficient basis, largely through advertising and sponsorship. On a principles basis, we therefore believe that Channel 4 should be excluded from the definition of the public sector under the new rules. Impact on competition and the creative industries Channel 4 has concerns that the scope of the proposals does not reflect the current HMRC framework for the creative industries and could have a detrimental impact on competition within the sector. We do not believe that the current proposed scope of the rules takes into account the specific nature of the creative industries, which operates a highly freelance and competitive marketplace for talent, often on short term contracts. It is important to recognise the inter-connected nature of the broadcasting industry and the benefits that talent movement across the sector can bring. It is vital that the UK s dynamic, ambitious and skilled broadcasting sector allows for flexibility and movement of creative individuals and fair competition between different organisations within the industry. In this context, applying new rules to publicly-owned broadcasters only and not to the wider industry would create competitive distortions in the market. This would place Channel 4 at a competitive disadvantage by subjecting it to different rules of engagement and costs versus those of its competitors. Furthermore, this would create an asymmetric and more complex tax system for individuals working in the creative sector who engage through PSCs with different sets of operational systems and rules for working with different organisations. We strongly believe that any changes made to the IR35 rules should not apply to one part of the creative industries sector in isolation any changes should either apply across the whole of the sector or should exclude organisations such as Channel 4, which operate in the commercial marketplace. This would help ensure a coherent and consistent tax system which provides certainty for both workers and engagers. We agree with HMRC that having a simple and effective tax regime with high levels of compliance is paramount, but we are concerned that the current scope of these proposals would undermine, rather than strengthen, the current system. 3

We recognise and support the spirit of what the Government is trying to achieve with the new rules. However, there may be other less problematic approaches to ensuring compliance with IR35 that are as effective and could be applied across the TV industry, while minimising the burdens on business that HMRC noted as a concern in the consultation document, such as provision of detailed data to HMRC to aid compliance or strengthening this requirement in contractual obligations. We would be happy to explore these options further with HMRC. Practicality & costs The new rules would require public sector engagers (and the agencies that provide workers to them) to make significant changes to their existing systems and processes. For example, they will need to ensure that they are collecting appropriate information about their suppliers in order to apply the new tests. There is not yet draft legislation to refer to, so software developers cannot start to build the IT solutions for applying the new rules. It therefore seems likely that many organisations will simply not have enough time to build and test a solution before the new rules take effect in April 2017. With this in mind it may be more practical for the new rules to come into effect in April 2018. Public sector engagers will need to spend time communicating with their supplier base, many of whom are unlikely to be aware of the new rules. Furthermore, even if suppliers have some awareness of the new rules, they may not be aware that some of their end users will be defined as public sector organisations for these purposes. Particular attention will need to be paid to engagements that will span the implementation date in April 2017, especially for those suppliers whose tax treatment will change under the new rules. This will be a time-consuming process. While the new tests are intended to be easy to apply, in practice there will be aspects that are difficult to interpret for people who are not tax specialists (e.g. whether a worker has their own company within the meaning of the IR35 rules). The teams that actually book workers onto engagement systems will not necessarily have detailed knowledge of employment status or the IR35 rules. Therefore additional training will be required for these teams both up front and in future to keep knowledge up to date. Under the new rules, there could be different employment status outcomes for the same PSC worker depending on whether they provide their services to a public sector or non-public sector body (as explained below in our comments on the new tests). This will then put the public sector body at a commercial disadvantage, as illustrated by the following example: A PSC P provides the same services for one month each to a public sector body A and private sector company B. P charges the same fee of 2,000 for the work to A and to B. Suppose that under the new rules P s engagement with A is determined to be employment whereas the engagement with B is self-employment. In this situation: the cost to A will be the 2,000 fee plus 169 employer NICs, so a total of 2,169 the cost to B will be the 2,000 fee alone If A wished to obtain the services from P for an overall cost of 2,000, it would have to negotiate a reduced fee of 1,840. However P might then turn down this fee, as it could obtain a higher rate from B. The new rules as proposed will lead to more engagements being treated as employment than would previously have been the case. Public sector engagers will therefore face additional ongoing costs that will not be borne by their private sector counterparts. These would include employers National Insurance, pension auto-enrolment costs, potential claims for employee benefits and potential claims to employment rights. Public sector bodies could also struggle to attract suppliers who happen to operate via PSCs (as they may prefer to work for private sector organisations where the current regime will continue to apply). 4

The new tests While some of the new questions are simple to understand, there remain points that would not be straightforward for someone who does not have experience of employment status assessment. As noted in ESM0516, one of the conditions for a contract of employment to exist is that there must be a sufficient degree of control over the worker. Under the new rules the engager will, presumably, still have to assess whether the level of control is sufficient. This is a subjective issue, so it may be difficult for non-specialists to answer this question with certainty. Where workers are engaged in TV production, the engager is likely to have some level of editorial input into how a production is made. Alternatively a crew member on a shoot might be issued with instructions from the director or producer. These circumstances could be construed as giving the engager control over how the workers on a programme should perform their work, but the worker may still be in a role that HMRC accept as being one of self-employment. The new tests ask whether the worker owns their own company. In some circumstances this will be simple to answer (e.g. if the worker is the sole shareholder of their PSC). However, the various conditions are not all straightforward to apply for people who are not tax specialists, and the information may be difficult to ascertain where there are several entities within a supply chain. The proposed new test only looks at a limited number of employment status factors. The new tests ignore other factors that would ordinarily have to be considered as part of the overall picture. This is problematic, as no one factor can determine an employment status assessment, and different factors take on varying levels of importance depending on the facts of the engagement under review. We appreciate that the proposed tests are intended as a simplification, but a consequence of this is that they would create false employments. Television is a sector where the use of freelance workers is particularly common, so performing high volumes of status assessments represents a significant administrative burden in this sector. In recognition of this, HMRC provide guidelines around how employment status should be determined for behind camera workers in order to simplify the assessment process. The new rules will produce different status outcomes to the HMRC Film & TV Guidelines. For example, camera operators who provide their own equipment are accepted by HMRC as being selfemployed. However, under the proposed PSC rules, a different assessment could apply to a PSC camera operator working for a public sector organisation, as: they are unlikely to provide materials that are consumed in the service they provide they are usually subject to instructions from the director on a shoot, so this could be construed as giving the engager control over how the camera operator provides their services there may be no right of substitution Therefore two workers in the same TV production grade providing their services to a public sector broadcaster could be treated differently simply by virtue of one being engaged as an individual (and self-employed under the Film & TV guidelines) and the other engaging via a PSC (and deemed an employee under the new rules). As a minimum, we would suggest that where a publicly owned broadcaster is engaging workers to perform a behind camera role on film or TV production, the Film & TV guidelines should continue to be used to assess the status of a PSC worker. This would provide greater certainty to workers in the TV industry that their status position will be unaffected by the ownership structure of the organisations they perform work for, and is consistent with the principle that the tax treatment should be determined by how work is performed. 5

Who bears the liability The obligation to assess the employment status of workers engaged as individuals sits with the engager, and the liability for tax, NICs and penalties also sits with the engager. The obligation to perform an employment status assessment for PSC workers under the current rules sits with the PSC, and, similarly, the tax and NIC liability sits with the PSC. If the obligation to perform a status assessment for PSC workers is to move to the engager of the PSC under the new rules, then it would be consistent for the liability for tax, NICs and penalties to move to the engager of the PSC. Notwithstanding the above, if the new rules have been applied in good faith by the engager of the PSC, and appropriate steps taken to obtain relevant information, then penalties for errors should not sit with the engager. In particular, if the PSC has deliberately given inaccurate information to the engager, and this information has resulted in an incorrect assessment being performed, then any liability for tax, NICs, penalties and interest should transfer to the PSC and/or the worker. Under the rules for engaging individuals, if an engager does not apply PAYE where it should have done so, a tax and NI liability will arise for the engager. There is then a mechanism (under SI 2003/2682 reg 72F) for the engager to set off some of its liability against the amounts of tax and National Insurance that are paid to HMRC when the individual submits their self-assessment tax return. This mechanism exists so that HMRC does not collect tax twice (first from the engager and then from the individual) on the same income. Under the current IR35 rules, the calculation of a deemed employment payment takes into account amounts that have already been paid to the worker by the PSC as employment income. Again, this is so that HMRC does not collect tax twice (first on the worker s salary and then from the deemed employment payment) on the same income. We believe that these principles of set-off should continue to apply in any new regime. There may be circumstances where, despite their best efforts to apply the new rules, the engager of a PSC does not apply PAYE where it should have done so. In such circumstances there should be a mechanism whereby the engager s liability can be reduced by taking into account the tax and NI paid either by the PSC (on a deemed employment payment) or by the individual worker (on salary received from the PSC). 6