Calls for ‘wholesale reform’ of IR35 in parliamentary committee report
After the government postponed the extension of the Off Payroll Working Rules (also known as the IR35 reforms) to April 2021 due to the coronavirus pandemic, the House of Lords economic affairs finance bill sub-committee has called for the government to use the extra time provided by the delay to completely rethink IR35.
The rules, which were due to come into force on 6 April 2020, would have extended the Off-Payroll Working Rules across the private sector, making businesses (or ‘end user clients’) who engage contractors via personal services companies responsible for determining the tax status of those contractors (see our previous blogs here and here).
Concerns raised in the report
After carrying out a detailed enquiry into the proposals, the sub-committee has produced a scathing 67 page report that describes the rules as ‘riddled with problems, unfairness and unintended consequences’. The committee has set out concerns over the burden that the reforms would place on both businesses and contractors, as well as the impact on the labour market and in particular on the gig-economy that the government has seemingly overlooked.
The report accuses HMRC of effectively passing on the problem of determining contractors’ tax status (an issue that it has struggled with for 20 years) on to businesses. The report notes that the burden on the business carrying out the status determination is a heavy one, and criticises the test that needs to be used to determine tax status as ‘complex’ and not fit for purpose.
Contractors also will be adversely impacted by the rules, according to the report, as they will effectively ‘bear the brunt’ of both employee and employer National Insurance contributions (which are likely to be passed on to them) and increased employment taxes. In addition, the sub-committee has flagged the unintended behavioural consequences of some companies. Specifically some companies have prepared for the implementation of the rules by laying off contractors rather than committing to paying to any additional employee taxes.
The report more broadly comments on the differentiation between self-employment status for tax purposes and self-employment status under employment law, noting that such distinction is unacceptable where individuals being treated as employees for tax purposes do not enjoy the rights and benefits of employees.
It also points out that in the event these rules are implemented next year, the impact felt by businesses and contractors alike will be heightened in the wake of Covid-19. The report points out that at a time where many will be recovering from crisis, any additional financial or organisational obligations will be unwelcome and it therefore recommends that further delay may be necessary.
Request for changes
In light of the findings of the report, the sub-committee had requested that the government considers alternatives to the reforms, but has acknowledged that ironing out the issues that it has identified would require changes that go beyond the tax system. It has also called on the government to give some certainty by making an announcement in six months to confirm if the rules will still be implemented, amended or delayed further.
The report is not unique in its criticism of the rules, and the comments reflect the concerns that have previously been voiced by those impacted by the changes. However, this call for change may not come as such welcome news for those who have invested significant time and resources into preparing for implementation of the regime and would be reluctant to unravel their well laid plans.
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Rachel Kendall is an employment associate
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