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.
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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David Kirk is a tax consultant specialising in employment status, employment taxes, intermediary work (including IR35), and Revenue inquiry work. He represents the ICAEW on the IR35 Forum, and is the author of Employment Status – the Tax Rules published by Claritax...