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The IR35 off-payroll working rules are flawed and have never worked satisfactorily since they were introduced 20 years ago, a parliamentary inquiry into the tax avoidance legislation has concluded.
The House of Lords-appointed Finance Bill Sub-Committee marked the completion of its inquiry into the government’s plans to extend the IR35 reforms to the private sector with the publication of a 67-page report that concludes a fundamental rethink of the entire legislation is long overdue.
“The evidence that we heard over the course of our inquiry suggests that the IR35 rules – the government’s framework to tackle tax avoidance by those in ‘disguised employment' – have never worked satisfactorily throughout the whole of their 20-year history,” the report states. “We therefore conclude this framework is flawed.”
The report urges the government to seize on its decision to delay the roll-out of the IR35 reforms to the private sector until April 2021 to analyse “holistically” the many problems the inquiry has uncovered with the legislation – and revamp it accordingly.
Under the proposed terms of the reforms, contractors would relinquish responsibility for self-declaring how they should be taxed, based on the work they do and how it is performed, to the medium-to-large private sector companies that engage them.
This change in responsibility will, the government claims, prevent contractors deliberately misclassifying themselves as off-payroll workers (outside IR35) to minimise their employment tax liabilities, when the way they work means they should be taxed in the same way as salaried employees (inside IR35).
“We understand why, in order to improve compliance and protect the tax base, transferring responsibility for operating the rules to clients was deemed a remedy for the problems which have beset IR35,” says the report.
However, the government’s reasoning for making this change fails to take into account the concerns of stakeholders about the impact the move will have on the wider labour market, and “severely” underestimates how much it will cost the private sector to adhere to, the report claims.
“The government made this decision after considering the issue too narrowly, in terms of its tax take,” says the report.
It goes on to say that the IR35 legislation itself is “flawed” and so, by extension, are the reforms that are built on top of them, because they treat an individual’s employment status as two separate things for tax and employment law purposes.
“This distinction is unacceptable, not least because it fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit,” says the report.
With regard to rolling out the reforms to the private sector, the inquiry says the government has insufficiently analysed the “behavioural consequences” of the move, in terms of how private sector firms are likely to respond to their new-found responsibilities.
As documented in the report, some private sector firms have sought to sidestep the requirement for them to individually assess the tax status of every contractor on their books by issuing blanket determinations.
This has seen large swathes of contractors, who were previously considered to be working outside IR35, classified as inside IR35, which means they will be taxed in the same way as permanent employees, but will not be eligible to access benefits such as paid holiday or sick leave.
Read more about the IR35 private sector reforms
- HM Treasury confirms roll-out of IR35 reforms to the private sector will be halted for a year to ease the pressure on businesses in the face of the coronavirus outbreak.
- ContractorCalculator CEO Dave Chaplin says the deferral of the IR35 reforms should be upgraded to a cancellation, as the response of employers to coronavirus highlights glaring inequalities between treatment of inside IR35 contractors and employees.
- The government stands accused of leaving IT contractors “out in the cold” by denying limited company contractors access to financial measures designed to support the self-employed through the Covid-19 coronavirus outbreak.
As previously outlined by Computer Weekly, there are concerns that this could lead to the creation of a “zero-rights” flexible workforce in the UK, which is another issue the report flags up as worrisome.
Other private sector firms, meanwhile, have decided to ban limited company or personal service company contractors from working for them, and are instructing individuals who want to continue to engage with them to do so through umbrella companies.
Such entities take care of the administration and accounts work that these individuals would previously have done while operating as a limited company contractor in exchange for a fee, and the umbrella company also assumes responsibility for invoicing the contractor’s client, ensuring the correct tax deductions are taken from their salary.
However, umbrella companies are largely unregulated and, although there are many reputable firms that offer these services, a number of others are linked to disguised remuneration and tax avoidance schemes.
The government-commissioned 2017 “gig economy” review by former Tony Blair adviser Matthew Taylor made a case for umbrella companies to be regulated more closely, and covered by the Employment Agency Standards legislation, which exists to protect the rights of agency workers.
In the run-up to the original April 2020 start date for the IR35 private sector reforms, there were calls for the roll-out to be delayed until this recommendation from the Taylor Review could be implemented.
The sub-committee report goes further than this, however, and calls for a number of other recommendations made in the Taylor Review, regarding the taxation of flexible workers, to be delivered on through a revamp of the IR35 legislation.
“After two years of promising to do so, the government should finally implement the recommendations of the Taylor Review of modern working practices: that the taxation of labour should be made more consistent across different forms of employment, while at the same time improving the rights and entitlements of self-employed people,” the report says.
“We believe the Taylor Review proposals offer the best long-term alternative solution to the off‑payroll rules, and provide an opportunity to consider tax, rights and risk together.”
A letter from the sub-committee to Jesse Norman, financial secretary to the Treasury, published ahead of the inquiry’s final report, saw it call on the government to consider delaying the deferred start date of the reforms beyond April 2021 – not only because of how problematic the reforms are, but also because the private sector will already be battling against the econonic fallout from the Covid-19 coronavirus pandemic.
In his response, Norman said the deferred start date still stands, and made reference to the various financial support measures the government has laid on to support businesses through the outbreak.
But the report reiterates the sub-committee’s concerns that pushing ahead with the April 2021 start date for the reforms is premature, because it would be “completely wrong” for the government to “impose a new burden on business” at that time.
It therefore urged the government to commit to an October 2020 declaration date about whether or not it intends to press ahead with introducing the IR35 reforms in April 2021, or if it does plan to delay the roll-out further.
“In the longer term, the government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off‑payroll working rules which we lay out in this report,” it says.
Dave Chaplin, the director of The Stop The Off-Payroll Tax Campaign and CEO of IR35 tax consultancy ContractorCalculator, said he hopes the serious concerns raised about the legislation by the inquiry are heeded by MPs.
“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 unfit 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 said.
He also cites the fact that the legislation has been pulled from a reading of the Finance Bill today as a positive sign that the tide maybe turning on the government's commitment to pushing ahead with the IR35 reforms.
“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,” he said. “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.”
Read more on IT legislation and regulation
IR35: Contractors demand tax and employment law alignment to protect ‘zero-rights’ workers
IR35 reforms: Qdos research suggests room for improvement
IR35 reforms: Private sector start date prompts mixed picture of predictions for contracting market
IR35 private sector reforms: Contractors call for further delays to April 2021 start date