Lords call for wholesale reform of IR35

IR35 – the Government’s framework to tackle tax avoidance by those in ‘disguised employment’ – needs a complete rethink because it is “riddled with problems, unfairnesses and unintended consequences”, according to a damning report from the House of Lords  Economic Affairs Finance Bill Sub-Committee.

The report says the tax framework has not worked properly throughout its 20-year history. IR35 has been rolled out to the public sector and was expected to be extended to the private sector in April, despite mass protests from contractors. This has been delayed for a year due to the Covid-19 pandemic.

According to the report, the Government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms, for instance, it says some firms have made “blanket status determinations” on status and some have decided “not to use freelance contractors at all”.  It says privates sector contractors are already being laid off, despite the reforms’ delay and that many witnesses told the Committee that the rules have made them “zero-rights employees” with none of the rights of being an employee, or the tax advantages of being self-employed.

The Committee calls on the Government to keep its promise on implementing the recommendations of the Taylor Review: that the taxation of labour should be made more consistent across different forms of employment and that there should be “a fair balance between tax, rights and risk”.

During the passage of the Finance Bill the Government intends to legislate to carry out external research on the impact of the reforms six months after they come into effect. The Committee consider this is too soon to give a full and accurate picture and calls on the Government to carry out this research 18 months after the rules have been in operation.

Lord Forsyth of Drumlean, Chair of the Sub-Committee, said: “The Committee welcomed the Government’s decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic.

“However, our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the Government. It must devote time to analysing all of this. A wholesale reform of IR35 is required.”

He called on the Government to announce in six months’ time whether it will go ahead with the roll-out to the private sector.

He added: “Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules.”

Response

The Government, however, says that it is right to ensure that two individuals sitting side-by-side and doing the same work for the same employer pay the same tax and national insurance contributions.

Dave Chaplin, Director of The Stop The Off-Payroll Tax Campaign and CEO of ContractorCalculator, said: “I applaud the Lords findings as they have clearly seen the Off-Payroll Tax for what it is – ill-thought through, ideologically led, unevidenced, cruel, misguided and ultimately un-fit for purpose.  Let’s hope that MPs listen to the serious concerns raised and postpone the legislation, then hold a proper review of IR35, as promised by the Government before the election.  A holistic approach now needs to be taken to treating the self-employed fairly in the tax system.”

He added:  “The legislation is obviously contentious amongst MPs given that it was pulled out of the order of today’s reading of the Finance Bill.  UK industry is currently on its knees due to the COVID-19 crisis so it would be irresponsible for the Government to consider putting the deeply flawed legislation into this Finance Bill. The UK economy will need the help of the UK’s flexible workforce to get back on its feet as we emerge from this crisis and that is going to take some time.  Now is not the time to apply a straight-jacket.”

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