MPs have voted against an amendment to the Finance Bill which set out to delay changes to IR35 legislation for off-payroll working, a subject close to the heart of many IT contractors.
Speaking for an amendment he tabled, David Davis, backbench MP for Haltemprice and Howden, said delaying the introduction of the legislation from 2021 to 2023/24 was essential given the likely long-lasting economic impact resulting from the COVID-19 pandemic.
"We need that time to actually understand precisely what the effect of a new policy will be," he told MPs last night. "It will be a disaster within the context of the economic crisis and the growing gig economy. The government has accidentally created that class of zero-rights employees: no holidays, no sick pay, no pension, no redundancy, no employment rights, whatsoever. We must stop that happening, either accidentally or deliberately."
The reforms to the IR35 rules make large and medium-sized businesses responsible for determining the employment status of contractors for tax purposes, rather than the contractors themselves doing this. The rules are designed to make contractors deemed to work as permanent employees pay similar income tax and national insurance contributions. The measure came into effect in the public sector in 2017.
Davis quoted a report from the House of Lords that said the new IR35 off-payroll tax rules were "riddled with problems, unfairnesses, [and] unintended consequences".
He said the government had considered the issue too narrowly by doing so solely in terms of tax revenue. "It has severely underestimated the cost basis of implementing the changes. And it did not analyse the unintended behavioural consequences of the proposed reforms, or their wider potential impact on the labour market and on the gig economy.
"In particular, many contractors in the coming years have been left in an undesirable halfway house: they don't enjoy the rights that come with employment yet they're considered employees for tax purposes."
Speaking for the government, Jesse Norman, financial secretary to the Treasury, said that non-compliance with IR35 legislation was costing UK taxman HMRC £1.3bn in revenue a year. On the issue of contractors' rights, he said those using personal service companies (PSCs) have the right to statutory maternity, paternity, adoption, parental bereavement and shared parental pay. PSCs could provide these payments and claim 100 per cent back from the government, he said.
What is IR35?
IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
The new rules require assessing whether the contractors meet HMRC's definition of self-employment – criticised by many techie contractors as being variable and difficult to comply with. The controversial Check Employment Status For Tax (CEST) tool provided by the taxman for the purpose has also been criticised by freelancers for giving different results at different times, being susceptible to being "gamed", and for excluding "mutuality of obligation" – the concept that the company is obliged to provide work and the contractor to accept it (which would make them more of an employee).
Critics say that being inside IR35 is essentially "no-rights employment", meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason.On the other hand, some have argued, many are using self-employed tax schemes to avoid tax attracted by their hardworking co-workers.
The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area has been described as an "utter shambles."
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
MPs voted against amendments to the Finance Bill and changes to IR35 are set to come into effect on 6 April 2021.
Seb Maley, CEO of specialist IR35 tax advisory firm Qdos, said: "The reform is short-sighted and if mismanaged poses a risk not just to contractors but to hiring organisations and recruiters. It's therefore up to private-sector firms to prepare for the changes, which can be managed with the right approach. However, work must start immediately."
Dave Chaplin, director of the Stop The Off-Payroll Tax Campaign and CEO of ContractorCalculator, said: "It is very disappointing that after four years of campaigning we have not achieved the primary aim of stopping this legislation.
"The market now needs to prepare and, with careful planning, firms have nothing to fear and can hire freelancers compliantly."
The IR35 reforms seem to have already discouraged companies from hiring independent contractors employed via PSCs. For example, Barclays, Lloyds, HSBC, Deutsche Bank and RBS have all said that they will no longer hire contractors in this way because the complex assessments to determine whether a contractor falls with IR35 rules create a risk of non-compliance.
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 has reported that BAE Systems had applied blanket determinations that put all their contractors inside IR35. ®