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Lords Report: New IR35 Off-Payroll Tax Rules – Treating People Fairly


On the 17th March the Government announced their intention to delay the much criticised roll out of Off Payroll rules into the Private sector until April 2021. This postponement was in direct response to the ongoing coronavirus crisis that we all continue to deal with. Whilst talk of IR35 may have almost be silenced by Covid-19, April 27th saw the House of Lords Economic Affairs Finance Bill Sub-Committee publish their much awaited report on IR35.

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Entitled “Off Payroll Working – treating people fairly”, the report did not disappoint. It was refreshing to read a report where the committee appeared to “get it”.  Lord Forsyth, Chair of the committee, said that the rules were “riddled with problems, unfairness, and unintended consequences”, and called for “a wholesale reform of IR35”. The committee concluded that IR35 had never really worked over its long 20 year history and that the “framework is flawed”.

Lords believe IR35 is "flawed"

The House of Lords support the original policy aim to ensure that there is fairness in our tax system and that contractors do not obtain an unfair advantage over others but they also recognise the ever changing nature of the labour market and understand the valuable contribution that contractors bring to the UK economy. They appreciate that the tax system needs to adapt to the modern labour market but they feel that the current IR35 system is “flawed” as it separates employment status for tax purposes from employment status under employment law. The committee describe this situation as “unacceptable”, going on to express concern that the IR35 rules were pushed ahead at a time when the implementation of the Taylor Review had stalled. The Taylor Review “recommended a more holistic solution than these (IR35) rules can offer”.  Keen to ensure that any changes to the legislation do not create a new group of “zero-rights employees”, the committee has urged the Government to look again and to take the time afforded by the delay to consider a broader approach to change.

Turning to the readiness of business to carry out the IR35 assessments, the Lords are concerned that end clients are not ready.  They question whether it is right to expect these clients to tackle a complex and grey area of law that even HMRC have struggled to comprehend over the years. There is recognition that assistance is available in the form of HMRC’s CEST tool but the Lords are unimpressed by the tool suggesting that it “falls well short of what is required”.

Critical of HMRC's evaluation 

Off Payroll rules were rolled out in the Public Sector back in 2017. This experience should have provided ample opportunity for HMRC to fully evaluate the effects of the policy. Just weeks before the roll out was due to launch in the Private sector, HMRC published information purporting to suggest that the Public Sector experience had been a success with  increased tax take and no evidence of incorrect assessments, false employment and blanket bans on Limited company contractors. The Lords have been scathing of this review, stating that it is “regrettable that no proper evaluation has been carried out into the effect of the off-payroll working rules in the public sector”. They do not feel that the Government have listened to the concerns of all stakeholders or that they understand what they are asking of business in terms of the true cost of “privatising compliance”. The report clearly states that the committee fears the Government has not “learnt lessons from the application of IR35 in the public sector” and they are urging the Government to use the delay to commission a full independent review.

Suggest that alternative solutions are properly considered

As well as commissioning an independent review the committee suggest that the delay is used to consider alternative approaches. During early consultation on the proposed off payroll rules, HMRC asked for suggested alternative solutions but they quickly dismissed them in their response to feedback. The House of Lords committee were unimpressed by this approach, “we do not believe that its resistance to alternative approaches has served the Government well.” They urge the Government to be flexible in their thinking and to consider potential solutions suggested made by leading industry experts.  They suggest that any alternative to the off-payroll rules should be certain, simple, fair, supportive of growth, administratively straightforward and enforceable. The committee go on to list several potential alternatives to the current proposed reform:

• A flat rate withholding tax

• Introducing a new style of limited company, ‘Freelancer Limited Company’

• A levy on using contractors

• Addressing the difference in NICs between the employed and self employed

• A statutory employment test

The Lords report clearly articulates the concerns of contractors, end clients and professional advisors in the industry; it provides us with some hope that Government can be persuaded to look again and have a re-think before April 2021.

The Government are still committed to reform

But on the same day as the Lords shared their report the financial secretary to The Treasury, Jesse Norman, alerted the House of Commons that the Government still intends to include an amendment enacting the private-sector off-payroll regime in the current Finance bill 2020-21. He went on the say “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,”. Appearing to give some acknowledgement to the Lords report, he added that the government would 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.

Will the Lords' report change Government thinking? 

Only time will tell if the Lords have managed to influence HMRC’s thinking; if Government have listened to the committee they should announce by October 2020 whether the reform will indeed be going ahead in April 2021. What we know for now is that the reform appears delayed not scrapped and all should continue to prepare alongside voicing concerns and objections. But who knows what will happen, could you have predicted this time last year we would be where we are now?

The House of Lords full report can be found here

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