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IR35: Off-payroll saga not over yet

David Kirk argues the Lords Report “Off-Payroll working: treating people fairly” has changed the IR35 game for the government, who may now struggle to force the already delayed legislation onto the statute book.

30th Apr 2020
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IR35 faces parliamentary hurdles
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It has been quite a dramatic week in the world of IR35. In the light of the Covid-19 crisis the government signalled a further delay to the roll-out of the off-payroll working rules to the private sector until April 2021. However, this proposed delay has not been included in the Finance Bill currently going through Parliament. A resolution to include this amendment had to be pulled from the agenda, due to Parliament’s inability to vote remotely.  

To make matters worse, a House of Lords Committee concluded its lengthy inquiry into the new legislation, and resoundingly rejected it as flawed, saying it requires a major overhaul

The Lords report is a tremendous piece of work. It lays bare the terrible mess already caused by the measure even before it has been adopted, the unintended (but forewarned) consequences that extend well outside the arcane world of tax that HMRC inhabit, and the gross unfairness of it all.  Virtually nothing has been missed out. 

Can the government push it through?

Make no mistake – the government is in big trouble here.  Jesse Norman’s bull-headed reminder to Parliament, at the Finance Bill’s second reading on 27 April, that the government would be proceeding with the IR35 private sector rollout in that Bill (to take effect in 2021) came only a few hours after the publication of the Lords report, and ignored it completely. Perhaps he and his advisers had not had time to review it properly, but they will definitely need to if they still plan to force their measure through Parliament.

I understand from the Stop The Off-Payroll Tax Campaign that there is considerable support from MPs across Parliament who are against these reforms, which could make the first hurdle of voting the measure into the Finance Bill a tough challenge.

Have the Parliamentary whips given any thought as to how they are actually going to get this through?  There is absolutely no excuse now for any MP who has supported that campaign not to vote against the measure when the chance comes up. Even if the Commons do vote it through, the National Insurance provisions (which is where the money in all this is) have to get through the Lords as well, where the government does not have a majority and the rebels seem to be on their own benches.

How damaging is the Lords report?

The Lords report is packed with information, but these are the areas where their Lordships clearly feel most strongly:

  • Timing - “The UK economy is facing its most severe crisis since the second world war,” the report begins. “Even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of COVID-19 is so great that it would be completely wrong for the government to impose a new burden on business in the form of the existing off‑payroll proposals.”
     
  • In-built flaws – “Off-payroll rules build on a flawed system - IR35. They separate employment status for tax purposes from employment status under employment law. This distinction is unacceptable, not least because it fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit.’  (Paragraph 30.)
     
  • Unfairness – “Since both clients and contractors have driven the increase in the use of personal service companies and benefited from the resulting tax treatment, it seems unfair that the contractor will effectively bear the brunt of the client’s National Insurance Contributions in addition to their own, greater, employment taxes.”  (Paragraph 98.)
     
  • Employment status – “It is unfair that contractors within the rules are treated as employees for tax purposes but do not qualify for employment rights, thus creating a class of “zero-rights employees”.  The Government is replacing one unfairness with another.’  (Paragraph 129.)
     
  • Unacceptable impacts – “Flexible working by contractors is a legitimate and important part of the UK labour market. However, contractors are in a different category to employees, and should therefore be treated differently. Unless the government accepts this distinction, the off‑payroll rules could eliminate by stealth contractor flexible working, or force contractors to use umbrella companies without adequate legislative protection.  Both outcomes would be unacceptable.’  (Paragraph 130.)

What about the tax?

A common view among MPs and the public is that there are winners and losers in every tax change and that government needs to raise the tax. But the Lords answered that argument too. In chapter 5 they set out six different ways of addressing the issue that have all been touted in the past, and though they do not come to any conclusions on their various merits it is hard to see how any of them could be worse than the government’s proposals. Some are better than others, but the government really ought to address them in a more considered way.

I expect this saga to continue.  It’s definitely not over yet.

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Replies (10)

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By tonyaustin
01st May 2020 10:12

The new rules require deduction of tax and NIC at source by a company paying for someone providing a personal service through a limited company. If that is flawed then so is the whole PAYE system which operates is exactly the same way for payments directly to individuals doing the same thing. The main reason companies have been used has been to get round the PAYE rules and avoid tax and NIC. The fact that due to HMRC's inability to enforce it properly, businesses have been getting away with it for 20 years and a whole industry has built up around it, is no reason for not changing it now. Unless, when hard hit companies get back to work and re-employ people they make them all use limited companies to reduce employment costs at the Government's expense. If you don't like IR35, make sure you have the right contract, like any self-employed person carrying on a trade or profession.

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By dstickl
01st May 2020 10:25

I disagree.

In my opinion: The main reason companies have been used has been to get ... the benefit of limited liability against mischievous lawyers, scammers, etc .

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Replying to tonyaustin:
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By raybackler
01st May 2020 10:45

Have you read the report? It so easy to generalise on something like this. The House of Lords report is excellent and so is the article above.

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Replying to tonyaustin:
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By fbdconsultancy
01st May 2020 12:26

A comparable tax regime should only apply where there are comparable rights applying across the board. This is not the case with IR35 or PSC legislation.

Equally, as has already been highlighted, there are a number of different reasons on both sides of the service provision equation as to why an individual and end client may choose to offer services through a different mechanism.

Any 'proper' review must take all facets of the equation into account before any semblance of parity can be addressed and 'fairness' achieved.

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Replying to tonyaustin:
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By NeilW
01st May 2020 12:51

"The main reason companies have been used has been to get round the PAYE rules and avoid tax and NIC."

Nope. It's to avoid employing people. If instead of complicated tax laws, the government had implemented the IR35 look through process in employment law there would now not be a problem.

And there would be a lot more people with employment rights.

Tax then flows naturally from the underlying legal position.

It's employment avoidance that is the problem. As ever the government had failed to address the root cause.

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By IANTO
04th May 2020 09:59

"The new rules require deduction of tax and NIC at source by a company paying for someone providing a personal service through a limited company."

The rules also require that the hiring company pays the employer's NIC. However, this isn't happening. Those that unfortunately had their situation changed prior to the recent postponement of the rules, were obliged to accept rate decreases where the EERS was effectively being paid by the contractor.

However, it;'s good to see that some politicians are beginning to accept the mantra "no employee taxes without employee rights", which I remind you all is what I've been saying since the inception of IR35.

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By dstickl
01st May 2020 10:20

Finally I see a use for the House of Lords, as this latest report seems to me to echo HL Paper 160 of six years ago (https://publications.parliament.uk/pa/ld201314/ldselect/ldpersonal/160/1... ) where its page 8, para 10, states amusingly in part: QUOTE We were surprised by the lack of co-operation from the Government. The Exchequer Secretary to the Treasury, who has responsibility for tax matters within Her Majesty’s Treasury (HMT), refused to attend an oral evidence session citing that our enquiry was concerned with HMRC’s application of the legislation. He also refused to allow Treasury officials to appear on the same grounds. The legal framework within which HMRC operates clearly affects the tax collection process and much of the evidence we received was concerned with the problems created by the IR35 legislation itself, not simply issues associated with its implementation. It was unfortunate that we were not able to discuss these issues with a Minister before making recommendations. ENDQUOTE
As I recall - rightly or wrongly the then QUOTE Exchequer Secretary to the Treasury, who has responsibility for tax matters within Her Majesty’s Treasury (HMT), [and who] refused to attend an oral evidence session citing that our enquiry was concerned with HMRC’s application of the legislation ENDQUOTE was an alleged awkward Mister David Gauke MP, who lost his seat at the last General Election - such is the curse of IR35 !!!
As wiki etc tells today in part:
On 20 July 2019, Gauke confirmed to The Sunday Times that he would resign as Secretary of State after Prime Minister's Questions on 24 July 2019, citing that he could not serve Boris Johnson as Prime Minister and run the risk of pursuing a no-deal exit from the European Union.[10][better source needed] Gauke and other similarly minded MPs became known in the media as the "Gaukeward Squad".[11][12]

Expenses[edit]
Gauke claimed £10,248.32 in stamp duty and fees involved in the purchase of his second home in London, a flat. A Channel 4 Dispatches programme revealed that he was claiming expenses on the flat in central London despite having a property located only one hour away on public transport.

Gauke sold the flat in August 2012, keeping £27,000, the property price having increased by £67,000 since purchase. He paid nearly £40,000 of this to the Independent Parliamentary Standards Authority (IPSA) as MPs only have to pay back any profit made in the previous two years.[13]

He told the British public that negotiating a price discount with tradesmen for paying in cash for the purposes of evading tax is morally wrong.[14]

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By jonharris999
01st May 2020 10:53

While I agree with David's thrust here, I fear that even if there is some kind of U-turn or modification, the damage is already done, especially in the private sector. The legislative changes are widely misunderstood and I have seen several examples of private companies being advised in a 'knee-jerk' fashion to, in essence, stop having contracts for service because it is 'safer not to'. I rather expect that soon they will stop calling plumbers or using taxis just in case the service provider is deemed their employee. And unfortunately, I think this ship has sailed already in the public perception, whatever may now happen to the legislation.

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By djtax
01st May 2020 11:32

The same Lords committee issued an equally damning report 18 months ago on the then proposed MTD for VAT. HMRC ignored everything in that report and went ahead regardless. Looks like same will happen here on IR35 - deja vu?

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By Nick Graves
01st May 2020 14:51

“Even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of COVID-19 is so great that it would be completely wrong for the government to impose a new burden on business in the form of the existing off‑payroll proposals.”

And indeed at any other time.

Entrepreneurs create; taxation destroys.

End of argument.

Yet still the bloody Dead Parrot Sketch goes on and on.

Though fair play to the Lords for sticking the boot in to all of the iniquities in this nasty piece of legislation.

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