The UK's House of Lords has produced a damning report into the government's delayed changes to the IR35 off payroll tax regime, saying they require a complete rethink.
The government had intended to push ahead with reforms to IR35, which would make large and medium-sized businesses responsible for determining the tax status of a contractor who works via a Personal Services Company.
The new rules require assessing whether the contractors meet Her Majesty's Revenue and Customs's (HMRC) definition of self-employment - criticised by many techie contractors as being variable and difficult to comply with. Previously, contractors were responsible for this.
Many witnesses told the Committee that the rules have made them 'zero-rights employees' with none of the rights of being an employee, or the tax advantages of being self-employed
The new rules were set to come into force at the beginning of the UK tax year, from 6 April 2020. However, the disruption caused by the COVID-19 outbreak caused the government to delay their introduction.
The respite gives the government the opportunity to completely rethink the legislation, the Lords say.
It is "completely wrong for the government to impose a new burden on business in the form of the existing off-payroll proposals," the report, "Off-payroll working: treating people fairly" [PDF], from the Lords' Economic Affairs Committee, Finance Bill Sub-Committee.
"The government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms. Contractors are already being laid off, despite the reforms' delay. Many witnesses told the Committee that the rules have made them 'zero-rights employees' with none of the rights of being an employee, or the tax advantages of being self-employed," it says.
Companies making 'blanket' rulings
The IR35 reforms appear to have warded private companies off hiring independent contractors that are employed via Personal Service Companies. For example, Barclays, Lloyds, HSBC, Deutsche Bank and RBS have all said that they will no longer hire contractors that work via PSCs out of fear that their firms will fall foul of the complex assessments that determine if a contractor is in scope of IR35 and be financially liable.
Other companies are pushing their freelance workforce into umbrella companies and PAYE situations, with what the contractors have claimed is an effective pay cut of up to 30 per cent. The Register recently reported that BAE Systems had applied blanket determinations that put all their contractors inside IR35.
Lord Forsyth of Drumlean, chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said: "Our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. 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. A wholesale reform of IR35 is required."
He called on clarity from the government, saying it should announce in six months' time whether it will go ahead with reintroducing these proposals in 2021.
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"Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules," he said.
CEST la vie...
The Lords also looked at the controversial Check Employment Status For Tax (CEST) tool, which the Treasury urges public sector bodies to use to determine whether their contractors fall inside or outside IR35. The tool has been criticised for giving different results at different times and being susceptible to being gamed by companies looking to push their contractors inside IR35.
The peers noted in the report that "up to 35,000 PSCs will be likely to have an 'undetermined status' under CEST" and that the committee had received criticism from many bodies, including NHS Digital, about their "experience of CEST".
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE) said: "The report by the House of Lords Committee is a much-needed dose of sense in the IR35 fiasco... "
"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."
Dave Chaplin, CEO of ContractorCalculator, said: "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. 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."
The review of IR35 was first proposed in the run-up to the last general election by then would-be chancellor Sajid Javid, who went on to briefly serve as Chancellor of the Exchequer. But when the Treasury made an official announcement in February, it said the rules would be reformed, rather than reviewed.
Following Javid's resignation, new Chancellor Rishi Sunak, promised in February that HMRC would not be "heavy-handed" in pushing its IR35 tax reforms.
Sunak then delayed the new rules from 6 April 2020 to 6 April 2021 in response to the ongoing spread of the 2019 novel coronavirus in order to help businesses and individuals.
However, chief secretary to the Treasury Steve Barclay later told Parliament the decision was "a deferral, not a cancellation" and that the government "remains committed to reintroducing this policy." ®