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Loan Charge Group MPs demand IR35 shake-up to stop contractors becoming ‘zero-rights employees’

Inquiry by Loan Charge All-Party Parliamentary Group calls on government to tweak IR35 legislation during passage of next Finance Bill

The government is facing calls from a 200-strong group of MPs to amend its 20-year-old IR35 tax-avoidance legislation over fears that its misuse is leaving growing numbers of contractors effectively working for companies as “zero-rights” employees.

The MPs in question, banding together as the Loan Charge All-Party Parliamentary Group (APPG), are calling for the IR35 legislation to be amended during the passing of this year’s Finance Bill to ensure contractors that are taxed like salaried workers receive the same workplace benefits too.

The MPs are also demanding a government-backed independent review later this year into how the contracting market operates, to ensure contractors are paid and taxed fairly for the work they do.

As things currently stand, if a contractor’s engagement with an end-client is found to be in-scope of the IR35 rules, this means they are considered by the company hiring them to be an employee for tax purposes.

This makes the inside-IR35 contractor liable to make pay-as-you-earn (PAYE) and national insurance contributions (NICs) as a permanent employee of the company would, but workplace benefits, such as paid holiday, sick leave and pension contributions, remain off-limits to them.

The government has made a series of amendments to the IR35 regulations in recent years, as part of an ongoing push by HM Revenue and Customs (HMRC) to clamp down on disguised employment by limited company contractors. 

These changes have included making end-clients in both public and private sectors responsible for determining whether the work they want a contractor to do means they should be taxed as an employee would be (inside IR35) or as an off-payroll worker (outside IR35).

The changes came into force in the public sector in April 2017 and in the private sector in April 2021, and have fuelled concerns since then about how these powers might be misused by employers to staff their companies with inside-IR35 workers who have zero employment rights to reduce their overheads.

What is IR35?

The IR35 off-payroll working rules were introduced at the turn of the millennium to ensure contractors that provide services through intermediaries, such as limited companies or personal service companies (PSCs), are paying the correct amount of tax based on the work they do and how it is performed.

When the rules were first introduced, it was the intermediary’s responsibility to decide whether the nature of the work the contractor did for their end-client meant they should be taxed in the same way as a permanent employee (inside IR35) or as an off-payroll worker (outside IR35).

An inside-IR35 designation essentially means that if the contractor were providing their services directly to the client (and not through an intermediary), they would be considered an employee, and so must pay the same income tax and NICs that a salaried worker would.

On an inside-IR35 engagement, the intermediary would be responsible for ensuring the correct income tax and NICs were deducted from the contractor’s gross pay. The intermediary would also be liable to pay employers’ NI.

In recent years, the government has set about revamping the way the IR35 rules work on the basis that letting contractors decide how they should be taxed – and leaving it up to them to ensure the correct employment taxes are paid – is a system that is open to abuse.

For this reason, the Loan Charge APPG is calling for the IR35 legislation to be amended on the basis that “tax law and employment law should be aligned”, so that an inside-IR35 contractor that is being taxed in the same way as an employee should also receive the same workplace benefits.

“We believe that the off-payroll rules, if they are to be introduced and retained as seems clear they are for now, should be looked at during the passage of the Finance Bill after this year’s Budget,” the group said in its 97-page report How contracting should work.

It continued: “We call on the government to accept that it is unfair to have workers who are taxed as employees without having the rights or benefits of an employee or recognition in employment law.”

The recommendation is one of several the Loan Charge APPG makes in the report, which was compiled following its months-long inquiry into the UK contracting sector’s inner workings.

The report flags that its recommendation to align tax and employment law is one the government has heard before, having been made previously in the 2017 “gig economy” review carried out by Matthew Taylor, former interim director of labour market enforcement.

The Taylor Review also made the case for umbrella companies – which many contractors are being encouraged to work through by end-clients looking to side-step the IR35 reforms – to be regulated before the public and private sector changes to the IR35 rules were ushered in.

The Loan Charge APPG report noted that neither of these recommendations has, at the time of writing, been acted upon.

“We find it strange and indeed regrettable that the government commissioned the Taylor Review, then ignored its conclusions and pushed ahead with the off-payroll rules roll-out regardless, despite having clearly been told that this would lead to contractors being taxed as employees, but without any employment rights or benefits,” said the report.

For this reason, the report called on the government to “revisit and consider” implementing the recommendations made in the Taylor Review, describing it as a “simple but hugely significant” move that would ensure that “anyone who is taxed as an employee also receives the corresponding benefits”.

The Loan Charge APPG inquiry sought to look at how the contracting sector operates in the UK at the moment and the factors that may have contributed to the emergence of non-compliant umbrella companies and disguised remuneration schemes, which have resulted in tens of thousands of contractors being caught by the government’s controversial loan charge policy.

Read more about IR35 and the loan charge

The report called on the government to acknowledge the role that the original IR35 legislation, and its subsequent reforms, have played in the proliferation of non-compliant umbrella companies and disguised remuneration schemes and, in turn, the fallout from the loan charge policy.

“We call upon the Treasury and HMRC to accept the clear and demonstrable role that the so-called IR35 legislation has had in the proliferation and use of unregulated umbrella companies and related arrangements, some of which have been involved ‘disguised remuneration’ schemes,” said the report.

“Instead of denying this reality, the Treasury should seek to implement legislative changes that create tax certainty for freelance workers which are appropriate and fair.”

As previously documented by Computer Weekly, the loan charge policy has seen thousands of IT contractors who participated in loan-based disguised remuneration schemes saddled with life-changing bills from HMRC for work they had done dating back decades. To date, there have been at least seven suicides linked to the policy’s introduction in November 2019.

“The IR35/off-payroll legislation has been a clear driver in the proliferation and use of unregulated umbrella companies and related arrangements, and the government should accept this,” the report added.

As reported by Computer Weekly, the Loan Charge APPG inquiry also called for umbrella companies and employment agencies to be regulated more closely in the wake of allegations made during the inquiry’s evidence sessions about some of the questionable behaviours these firms engage in.

These included accusations about employment agencies receiving tens of thousands of pounds in “kickbacks” from umbrella companies in exchange for promoting their services to the contractors the agencies are responsible for finding work for.

“A fundamental conclusion of the How contracting should work inquiry is that the unregulated umbrella market is out of control,” said the report, “all too often exploiting contractors (even without them realising it) and is also a key reason for tax avoidance schemes operating and being so readily and openly advertised.”

The report went on to seemingly make the case for employment agencies to stop outsourcing their payroll responsibilities to umbrella companies in the interests of “simplifying the supply chain” and improving transparency.

It said: “We believe this should be a much more common (and perhaps mandatory) option offered to contractors, alongside a straight ban on recruitment companies telling any worker that they must use a certain umbrella company or payment intermediary, with a legal requirement for any financial incentives to be declared if they recommend any specific intermediary [umbrella].”

Key recommendations in the Loan Charge APPG’s report

As well as tweaks to IR35 during the passage of the Finance Bill, the report closed by requesting that the government conduct a “full and proper debate” at the same time so that details of how best to eradicate malpractice and bad actors from the contracting supply chain can be addressed.

Several government departments were asked to respond to the report’s findings, including HMRC, HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS), with BEIS currently analysing data from a 2019 consultation on how best to regulate umbrella companies.

A government spokesperson said, in a statement to Computer Weekly: “Protecting and enhancing workers’ rights through robust regulation – including for those employed by umbrella companies - is a top priority for this government.

“We have already introduced requirements to improve the information provided to new agency workers about their contractual terms and pay rates, and have committed to establishing a single enforcement body to further protect vulnerable workers.” 

Dave Chaplin, CEO and founder of contracting authority ContractorCalculator, was one of a number of individuals who supplied evidence to the Loan Charge APPG’s inquiry. He said its findings serve to highlight precisely why the IR35 legislation is long overdue a revamp.

“There are some strong recommendations and worrying observations in this report and lots more work needs to be done so that contractors are treated fairly and properly,” said Chaplin. 

“Before any legislation is passed, which won’t happen overnight, the supply chain should seek to introduce clear and better transparency to ensure workers are given full rights if they are considered to be “deemed employees” under the new off-payroll tax rules.

“Contractors who now find themselves inside IR35 are in an untenable position – they are working PAYE but have none of the rights that come with permanent employment. Zero-rights employment is simply wrong.”

Chaplin added: “It’s time to finally overhaul the discredited IR35 legislation, which everyone knows doesn’t work, and come up with a way to properly recognise contracting and freelancing in the tax system and ensure people are either classed as self-employed or as employees with full rights and benefits.”

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