MPs call for rethink of recent private sector IR35 changes

All-party parliamentary group says tax and employment status should be aligned, as experts warn firms need to be diligent about using umbrella companies

A group of MPs and peers have called on the government to rethink changes to the off-payroll rules, commonly referred to as IR35, introduced in the private sector earlier this month, arguing that tax status and employment status should be brought into line.

In the report, members of the loan charge all-party parliamentary group (APPG) warned that being able to classify contractors as employees for tax purposes without providing the same rights as an employee creates uncertainty for businesses, which could result in “damaging and unintended consequences”.

The report said not only had IR35 failed to prevent tax avoidance by individuals falsely claiming to be self-employed, but it had also “ironically muddied the waters and unintentionally made it harder, not easier, to define contracting”.

IR35 was first introduced in 2000 to ensure people who were working like an employee, but through their own limited company, paid broadly the same tax as someone employed directly. Previously, contractors providing services for organisations outside the public sector were responsible for deciding their employment status for tax purposes.

However, after being pushed back a year because of the coronavirus pandemic, the new off-payroll working rules finally came into force in the private sector this month, shifting the onus for who is caught by the tax rule from the contractor on to their employing organisation. The change, which has been in place in the public sector since 2017, is designed to tackle employer non-compliance with the rule, which the government says is estimated to cost the Exchequer £1.3bn a year by 2023-24.

The APPG called for these changes to be amended in this year’s finance bill to ensure workers who are caught ‘inside’ IR35, and therefore taxed like an employee, would also be given holiday pay, sick pay and other employee benefits. 

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The report said: “We believe that all ‘inside IR35’ workers should be offered the choice to be remunerated by a simple payroll operation and get full rights under agency legislation, with a clear and transparent right to holiday pay.

“In order to ensure that workers are protected, they should not be forced to opt out of the Conduct of Employment Regulations if they are not working on an ‘outside IR35’ basis via a limited company.”

The report also warned that the new IR35 rules could see many contractors in the private sector forced to work under umbrella companies, which the APPG said were often unregulated and left contractors vulnerable to hidden costs or mis-sold tax avoidance schemes.

Baroness Susan Kramer, a Liberal Democrat peer and vice-chair of the loan charge APPG, described IR35 as “deeply flawed” and said it had “opened the door to rogue providers and the mis-selling of tax avoidance schemes.

“The forthcoming finance bill [should] scrap or at least amend the off-payroll rules to tackle bad practice in the supply chain and to ensure that anyone who is taxed as an employee receives genuine employee rights and benefits,” she said.

“We also call on the government to announce the review into self-employment that they promised, so that, rather than constantly penalising contract and freelance workers, we move to a proper system of recognition and structuring of this important way of working, which is increasingly commonplace and important to the economy.”

Crawford Temple, CEO of Professional Passport, urged businesses to do their due diligence on any recruiters using umbrella schemes to ensure they were compliant with the rules. 

“Good umbrella firms are open and transparent in their dealings with workers and provide a clear contract of employment that explains how they will be paid, what deductions there will be and for what, how their expenses are paid and how their holiday pay is worked out,” said Crawford.

But, he warned, many contractors would be “new to umbrella working and may be easily duped into signing up for a tax avoidance scheme that will ultimately put them under considerable financial risk”.