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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.

28th Apr 2020
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House of Parliament

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.

Sub-committee findings

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.”

Replies (14)

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By Tax Networks
29th Apr 2020 08:58

Will the Government exercise its veto?

IR35 and the Inequity of Outcome has not yet caught the rabbit Jesse Norman staring into the headlights.

It’s a roadkill waiting to happen.

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By petestar1969
29th Apr 2020 10:22

They should just scrap IR35 altogether and ramp up corporation tax instead to discourage people trading through small limited companies, if that's what this all about.

When I started my accountancy training in 1990 most of our small business clients were unincorporated because the corporation tax rate was 35%.

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Replying to petestar1969:
By rbusfield
29th Apr 2020 11:05

Many people would like to incorporate in order to limit their liabilities

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Replying to rbusfield:
By flightdeck
29th Apr 2020 12:49

What's stopping them?

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By NeilW
29th Apr 2020 10:32

Correct. That's because it is, and always has been, an employment law matter, not a tax matter.

Eliminate the employment avoidance in employment law and the tax avoidance will naturally follow.

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David Kirk profile image
By David Kirk
29th Apr 2020 10:40

Just one small point here: the Government haven't actually added enabling clauses to the bill. They have said that they are going to do so, which is slightly different as they have to get it past the Commons.

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By johnjenkins
29th Apr 2020 12:26

When are those in power going to realise that employment status is a commercial matter not a tax matter. It always has been and always will be. That is the reason that IR35 has never, isn't and never will work in any guise. Employers NIC is another monstrosity that needs to go. At least smaller companies are getting relief on that.

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By North East Accountant
29th Apr 2020 12:57

When the Government get the Coronavirus bill in they will might just put everyone on PAYE, whatever your trading structure.

IR35 then dead.... job done.

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Replying to North East Accountant:
By johnjenkins
29th Apr 2020 14:03

Or if they have a bit of foresight make everyone self employed.

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By vstrad
29th Apr 2020 14:59

If Jolyon Maugham's against it, I'm for it. Now, what was it again?

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By raybackler
29th Apr 2020 15:02

I have just finished reading the whole sobering report from the House of Lords committee and it is excellent. Anyone ignoring the contents is just sticking their head in the sand. The usual culprits in the continuing IR35 20 year saga are HM Treasury and HMRC. Both only focus on tax and by ignoring the wider impact on the economy, I'm afraid their heads are well and truly in the sand.

The wider picture demands a status of 'worker' (or any equivalent name), similar to the self employed. The self employed, the gig economy workers and contractors have long enjoyed an NI advantage over the employed and the gap is too large. All that is required is to narrow this gap whilst, providing a discount for loss of employment and benefit rights.

The self employed pay 20% tax and 9% NI. Contractors pay 7.5% dividend tax and 19% Corporation Tax. Employees pay 20% Tax and 12% NI plus their employer pays 13.8% NI. When reaching the higher rate tax threshold, self employed NI drops to 2% and tax doubles to 40%, Dividend tax increases to 32.5%. Employees also have their NI drop to 2%, but their tax also doubles to 40%.

For someone earning less than £50000, there is an advantage being self employed over being a contractor. When incomes rise to £100000 as a contractor, this advantage disappears completely. The differences either way at varying levels of income could be smoothed out.

As an example, if the self employed paid 12% NI and Contractor's paid 12% dividend tax that would level up the field between them. Maybe the engaging client could also pay a levy, say 5%, to cover the lack of employer's NI, but respect the lack of employment rights. Alternatively the self employed and contractors could pay a higher level of NI, say 17% up to the standard rate limit.

The introduction could be phased over three to five years, as happened with Auto Enrolment. I hasten to add that this is only an example and there are many ways of solving this problem without the nonsense of reforming the broken IR35 model. And that is the conclusion of the House of Lords committee, not just mine.

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Replying to raybackler:
By johnjenkins
29th Apr 2020 15:13

Therein lies the problem. HMRC under Gordon Brown created a problem that at that point didn't exist. The motive was to raise money to pay for his incompetence. We are now in this position because of it.
Equalisation can only come about when everyone pays a flat rate of tax. No NIC, no 40%. The higher paid are contributing more because they are earning more.
There is a big difference between being self-employed and being employed. That fact seems to have been lost in the strive to put everyone on PAYE.

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Replying to johnjenkins:
By philaccountant
30th Apr 2020 14:07

Gordon Brown hasn't been chancellor for a decade! We've had ten years of Conservative governments trying to fix this and the problem is worse now than it was then! But sure, it's all Brown's fault...

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Replying to philaccountant:
By johnjenkins
30th Apr 2020 15:32

Ok, you're right but the mess Labour left the country in didn't allow too much leeway, considering it was a coalition to start. Then the EU, now covid 19.
Unfortunately we don't have a politician with balls enough to sort it out. As soon as Government get it out of their heads that employment status is in their domain then we might get somewhere.

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