Government Replies to House of Lords investigation into IR35 reform

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On 1st July, the government published a written response to the recent House of Lords report into the off-payroll working rules, addressing a number of the key points it put forward.

Having spent more than two months considering the ‘House of Lords report: treating people fairly’, that found the IR35 rules to be “riddled with problems, unfairnesses, and unintended consequences”, in this response the government defended the decision to introduce IR35 reform in the public sector in 2017 and give private sector changes the green light for 2021.

We’ll now dissect the government’s entire response, which explored issues such as blanket IR35 assessments, employment rights, the Check Employment Status for Tax (CEST) tool, along with several other areas.

Another IR35 delay “would create uncertainty”

The government gave reasons for ignoring the report’s advice, which was to hold off announcing the reform until October 2020 when the Sub-Committee believes the full impact of Coronavirus will be clearer.

The response stated that reform had already been delayed by one year and many businesses would have been prepared for the expected 2020 roll out. The importance of offering companies “clarity over the timing of the implementation of the reform, and the final legislation” was also referenced, with the government taking the view that waiting until October to make a decision “would create uncertainty.”

Promises were then made by the government to provide further support to private sector businesses, while the ‘light touch’ that means HMRC will not impose penalties for the first 12 months after the changes was also touched on.

Employment rights issue overlooked

The House of Lords report urged the government to continue implementing the recommendations made in the Taylor review, published in 2017 to help improve clarity and certainty regarding employment status, amongst other things.

In response, the government explained the Good Work Plan, released in 2018, will continue to carry forward the advice of the Taylor review, which has already led to the introduction of a written statement containing core employment terms for all workers from day one.

As welcome as this may be, contractors might be wondering why the government didn’t directly respond to the Sub-Committee’s concerns about the creation of zero-rights employment where contractors working inside IR35 are employed for tax purposes without receiving employment rights.

Need for IR35 reviews accepted at least

Concerned about the success of public sector IR35 reform, the Sub-Committee urged the government to “undertake an independent review” to inform the roll out of private sector changes next year.

In response, the government said they commissioned independent research soon after the public sector changes were enforced in 2017, with the findings showing there was “no significant disruption to the sector or its use of contingent labour as a result of the off-payroll reforms.”

The government also stated that four consultations have taken place since 2015, but they did at least agree with the Sub-Committee who said that the legislation should be continually scrutinised. With this in mind, further research will be published before private sector changes are introduced.

Market impact dismissed

In the House of Lords report, the Sub-Committee expressed concerns about the effect private sector reform may have on the contractor workforce and in turn, the flexibility of the UK labour market.

The government did accept that some businesses may stop engaging contractors due to the changes, describing this as a commercial decision “driven by a wide range of factors”. However, the response stopped short of acknowledging the changes will have a bigger impact, claiming there hasn’t been a reduction in demand for contractors in the public sector.

Blanket assessments considered

The government refused to be drawn on concerns made by the Sub-Committee regarding blanket assessments, which are not compliant. Instead, they explained the difference between compliant and non-compliant IR35 decisions, before stressing the importance of businesses determining status with ‘reasonable care’.

Going forward, the government said they will take into account the issues raised in this report and offer organisations “additional support” to ensure status assessments are approached correctly.

CEST’s flaws denied

In response to the Sub-Committee picking apart the Check Employment Status for Tax (CEST) tool, which was described as “not fit for purpose”, the government explained it was “rigorously tested against employment status case law”. They also said HMRC has made “significant enhancements to CEST since it was first introduced in 2017.”

When addressing the issue of CEST not providing an answer in all cases (with the tool delivering a decision in 80% of the time), the government stated that HMRC have seen “a significant increase in this percentage” in recent months. The tax office is also said to be “exploring a number of other changes to improve the usability of the service”.

However, the government’s defence of the tool is unlikely to be accepted by contractors and its biggest critics.

Cost to business will be explored

Fears held by the Sub-Committee about the potential cost of the reform to businesses were responded to, with the government stating that HMRC have already started reviewing the financial burden of implementing the changes. This information will be published at the next fiscal event.

Non-compliant umbrellas to face scrutiny

The government agreed with the Sub-Committee who is worried about the possible increase in non-compliant umbrella companies due to IR35 reform and is taking action to prevent this.

In addition to working with the “Advertising Standards Authority and other third parties to prevent the publication of misleading information by umbrella companies”, the government nodded towards the promise they made in the Budget in March 2020 to tackle this non-compliant activity.

Alternatives to reform dismissed

The House of Lords report also proposed several different options to the off-payroll working rules. However, each of these were rejected by the government at the consultation stage because they would, for various reasons, “create a group that are exempt from the employment status tests and subject to a separate advantageous tax regime”.

In conclusion, this response wasn’t well received by contractors and industry experts, many of whom have criticised the government failing to listen and insisting on introducing IR35 reform into the private sector on 6 April 2021.

What should we do now?

With confirmation that the off-payroll reforms in the private sector will definitely be going ahead in April 2021, now is the time to continue preparations that may have been paused following the deferral news in March. Visit our recruiters IR35 hub for all the information you need about the legislation and the upcoming reforms.