The new IR35 rules are designed to address perceived tax abuses associated with off-payroll working. They were set to come into force this month but were delayed until April 2021 as a result of the Covid-19 pandemic.
The House of Lords economic affairs finance bill sub-committee has today published a report urging the government to use this extra time to completely rethink the legislation.
“We suggest that the government should use this additional time to reconsider its proposals, paying greater heed to wider changes in working practices,” it says.
This is one of the conclusions of the committee's report, Off-payroll working: treating people fairly.
IR35 – the government's framework to tackle tax avoidance by those in 'disguised employment' – has not worked properly throughout its 20-year history, the report says. But the government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms. Contractors are already being laid off, despite the reforms' delay. 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 therefore 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 reckons that this is too soon to give a full picture and says that the research should be 18 months after the rules have been in operation.
Lord Forsyth of Drumlean, chair of the House of Lords economic affairs finance bill 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.
"The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year? The government needs to think this through very carefully. We call on the government to announce in six months' time whether it will go ahead with reintroducing these proposals.
"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."
Seb Maley, chief executive of tax accountant Qdos, described the Lords report as ‘eye-opening’. He said: “The Lords are correct to question the proposed reform and also the IR35 legislation in its entirety, making the point that the government needs to make wholesale changes to these needlessly complex rules. Expecting contractors who are placed inside IR35 to work as ‘zero-rights employees’ is unrealistic, not to mention unjust and unfair. Tax status and employment rights must be aligned before the changes arrive, to at least hand contractors who pay employment taxes something in return.”
He added: “Private sector firms and contractors have enough on their hands as it is, without the pending arrival of poorly thought out tax changes next year. Although, whether the government has any intention of listening to the advice in this report remains to be seen - recent history tells us otherwise.
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), said: “The report by the House of Lords committee is a much-needed dose of sense in the IR35 fiasco. It rightly highlights the inherent flaws in the government’s IR35 proposals and warns it off implementing the changes as they stand. We could not agree more: it is clearly time for the government to rethink its entire approach to IR35.
“IPSE gave evidence to the committee warning that the changes to IR35 would be a disaster and that many private sector companies were already scrapping their entire contractor workforces. It is excellent to see the committee heeded our warnings and is pressing them on the government.
“The contractor sector is already under immense strain because of the coronavirus crisis and the pointed lack of government support for the majority of contractors who work through limited companies. The last thing this embattled sector needs now is the ill-conceived and destabilising changes to IR35. We urge the government to follow the advice of the committee and the Taylor Review and instead of IR35, conduct a full taxation review to create a fair balance between tax, rights and risk.”