Government should use IR35 delay to ‘completely rethink’ legislation, report says

27 Apr 2020 By Siobhan Palmer

House of Lords committee finds the proposed changes to off-payroll tax rules are ‘riddled with problems’ and calls for an independent review

The government should reconsider the planned changes to private sector IR35 off-payroll rules, a parliamentary report has said, claiming that the change as it stands is “riddled with problems”.

The House of Lords Economic Affairs Finance Bill Sub-Committee has called on the government to use the extra time caused by the delay to the rollout of the changes – which was pushed back by a year because of the coronavirus outbreak – to “completely rethink the legislation”.

In a report published today, Off-payroll working: treating people fairly, the committee claims the government had not sufficiently analysed the “unintended behavioural consequences” of the reforms. It called for an independent review of how the reform was rolled out in the public sector and its impact on the labour market before any changes are implemented in the private sector.

It also said the reforms put a heavy burden on businesses, and suggested organisations could need “considerably longer than a year” to recover from the disruption caused by the coronavirus pandemic.

Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced to ensure workers undertaking similar roles paid the same tax regardless of whether they were an employee or contractor.

The changes to IR35 in the private sector will shift the responsibility of assessing which contractors fall into this category to employers. The new rules have applied to public sector employers since 2017 and were originally due to come into force in the private sector at the start of this month, but this has been delayed until April 2021 because of the coronavirus pandemic.

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At the time, Steve Barclay, chief secretary to the Treasury, stressed this was “not a cancellation”, and said the government remained committed to the policy.

While the delay was widely welcomed by both employers and the self-employed, giving both more time to prepare for the change, the Lords committee called for a wider rethink.

Lord Forsyth of Drumlean, chair of the committee, said the inquiry found the off-payroll tax rules to be “riddled with problems, unfairnesses and unintended consequences”, and called for a “wholesale reform of IR35”.

“The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the government. It must devote time to analysing all of this,” he said.

The report also said the committee had heard evidence that private sector organisations – many of them large businesses – were already refusing to engage any freelance contractors so as to avoid navigating the complex legislation, and questioned whether HMRC’s check employment status for tax tool for identifying whether a worker falls inside or outside the legislation was fit for purpose.

Matt Fryer, head of legal services at Brookson Group, noted that HMRC had already been made aware of many of the issues highlighted in the report, and that the draft legislation had been created with such concerns in mind. 

He advised businesses to “learn from the mistakes made in the run up to the deferred April 2020 rollout and continue to make preparations for April 2021”, adding that while it was important to keep an eye on HMRC’s reaction to the inquiry, “it would be dangerous to assume that any significant changes will be made until such time as any updates are published.”

Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, who gave evidence in the committee’s inquiry, said he “could not agree more” with the report’s conclusions. “The contractor sector is already under immense strain because of the coronavirus crisis and the pointed lack of government support for the majority of contractors who work through limited companies,” he said.

“We urge the government to follow the advice of the committee and the Taylor review and, instead of IR35, conduct a full taxation review to create a fair balance between tax, rights and risk.” 

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