Government ignores Lords call for ‘wholesale reform of IR35’
The IR35 framework is “flawed” and has “never worked satisfactorily”, the House of Lords Finance Bill committee concluded in a damning report on the off-payroll rules. But that didn't stop the government from adding the enabling clauses to the bill.
Following its IR35 inquiry, The House of Lords Economic Affairs Finance Bill sub-committee urged the government to use the 12-month delay caused by Covid-19 to “give serious consideration to the fairer alternatives”.
Lord Forsyth, the chair of the committee, said the rules were “riddled with problems, unfairness, and unintended consequences”, and called for “a wholesale reform of IR35”.
“The evidence that we heard over the course of our inquiry suggests that the IR35 rules have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed,” said the Off-payroll working: treating people fairly report.
But later in the day that the report was published (Monday 27 April), financial secretary to The Treasury Jesse Norman alerted the House of Commons during the second reading of the Finance Bill 2020-2021 that the Government still intends to include an amendment enacting the private-sector off-payroll regime in the current bill.
“The government remain fully committed to introducing these reforms to ensure that people working like employees but through their own limited companies pay broadly the same tax as individuals who are employed directly,” said Norman in the virtual commons debate. An amendment will be added to set the commencement data for 6 April 2021 and in a sop to the Lords, he added that the government will use the additional time to commission further external research into the long-term effects of the reforms in the public sector before inflicting them on private sector engagers.
The government was certainly swift to respond to the Lords committee’s call to confirm by October 2020 whether it plans to implement the new rules. But the decision to proceed will disappoint the Lords and other critics.
Among the litany of criticisms in the report, the Lords argued that the government had “severely underestimated the costs to business of implementing the changes” and “considered the issue too narrowly, in terms of its tax take”.
One of the consequences of the reforms the report highlighted was the effect on the gig economy, and used this opportunity to take swipe at the government for sitting on the recommendations of the Taylor Review.
The Lords also criticised the government for failing to listen to concerns raised by stakeholders. During its investigation, the House of Lords Finance Bill committee heard from accountancy bodies, who questioned the readiness of the reforms. Anita Monteith told the committee the ICAEW was waiting to hear back on 100 unanswered questions.
These concerns along with other descriptions of blanket employment status determinations and early termination of contracts had led the Lords to conclude that the changes will trigger widespread disruption.
With the UK facing a stark economic crisis, the Finance Bill committee encouraged the government to consider these problems during the 12-month delay – not least because businesses are going to need a lot longer than a year to recover. “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,” the Lords concluded.
Profession backs the findings
The ACCA’s Jason Piper, who was a witness in the Finance Bill committee inquiry, backed the findings, but went further than the Lords’ committee and suggested a two-year deferral rather than one to give businesses more time to adapt.
“The roll-out of these changes to the private sector seems to have been considered purely from a compliance and revenue raising perspective. While it’s absolutely right that HMRC concern itself with ensuring that the right amount of tax is paid at the right time, government is about more than collecting taxes,” he said.
“It’s about maintaining a healthy and diverse labour market to support a flexible and responsive economy, and an undue focus on revenue raising to the exclusion of all else risks damaging the underlying commercial activity that the taxes are paid on.”
Meanwhile, critics of the reforms applauded the Lords’ findings. Dave Chaplin, the CEO of ContractorCalculator, urged MPs to postpone the contentious legislation and hold a proper review of IR35 - something the Chancellor hinted at with possible national insurance reforms on the cards at the press conference when he announced the Self Employed Income Support Scheme in March.
“A holistic approach now needs to be taken to treating the self-employed fairly in the tax system,” Chaplin said. Considering the current pandemic, “Now is not the time to apply a straight-jacket,” he added.
However, on Twitter, tax barrister Jolyon Maugham questioned the accuracy of some of the Lords’ findings. “The reality is that there is a vast class of (largely) higher-earners who have avoided paying the right amount of tax for decades because lobbied changes at the outset of IR35 made it practically impossible to enforce. They are (rightly) targeted by these measures.”