Do the IR35 changes need a rethink?

Reforms to off-payroll working rules have been delayed, but should the government use the time to revise its approach, ask Alison Woods and Andy Atwell 

In March, the Treasury announced that the off-payroll reforms for medium and large companies in the private sector (often colloquially referred to as IR35 and due to go live on 6 April 2020) had been postponed until 6 April 2021. This was part of a package of financial measures to help companies and individuals in light of the spread of Covid-19. 

Prior to the deferral, the House of Lords Economic Affairs Finance Bill Sub-Committee was tasked with reviewing the proposals outlined in the draft Finance Bill 2019 and its findings have been published in a report entitled Off-payroll working: treating people fairly. The report states that the off-payroll working rules build on flawed IR35 rules which ‘have never worked satisfactorily throughout the whole of their 20-year history’. While welcoming the delay to implementation, the report recommends the government use the extra time to fundamentally rethink its approach to the off-payroll rules and reform the IR35 test of employment status. 

Concerns and recommendations 

One of the key concerns highlighted in the report is that the proposals have already resulted in a number of blanket status determinations, early termination of contracts, and many contractors being left as ‘zero-rights employees’ ( so without the rights of employees or the tax advantages of being self-employed). 

The report makes several recommendations and encourages the government to: 

  • Announce by October 2020 whether the off-payroll rules will be further delayed as a result of the pandemic.
  • As a short-term measure, consider alternatives to the off-payroll rules on the basis that they should be certain, simple, fair, supportive of growth, administratively straightforward and enforceable. 
  • As a long-term measure (and using the same principles), implement the Taylor review proposals which recommended a new clear test of employment status, an alignment of tax and employment status, and consistent taxation of different types of labour. This is thought to provide the opportunity to consider tax, rights, and risk together on a holistic basis. 
  • Commission a more considered and comprehensive review of the impact of the off-payroll rules in the public sector to analyse how the proposed reforms will affect the private sector. 
  • Address the deficiencies in the support provided by HMRC and the CEST tool on the basis that they both currently ‘fall short of what is required’. 
  • Assess the financial burden of implementing the proposals and the effect that this would have on the flexibility and diversity of the labour market and the broader economy.  
  • If the off-payroll rules are implemented in the private sector, carry out research on their impact 18 months after launch. 
Despite the House of Lords report, Jesse Norman, financial secretary to the Treasury said the government was still ‘fully committed’ to introducing the off-payroll reforms next year. On this basis, businesses should continue to assess their existing arrangements and consider to what extent they are affected by the reforms.

The year’s delay hopefully ensures that all parties have the opportunity to be adequately prepared in terms of strategy, contracts and process well in advance of implementation. While companies will of course be urgently addressing issues which have arisen in the wake of Covid-19, there will also be a desire in many quarters not to lose momentum on what has been an industry-wide project to realign contractor engagements. 

Alison Woods is a partner and Andy Atwell a senior associate at CMS