Lords Review of IR35 Reforms Published

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Off-payroll working rules: ‘riddled with problems, unfairness, and unintended consequences’. House of Lords publish critical review of the off-payroll working reforms and IR35 legislation.

The House of Lords inquiry into the off-payroll working rules concluded with the publication of a report that is highly critical of the proposed reforms and IR35 legislation underpinning them. The report, published on 27th April 2020, concludes that the IR35 framework itself is flawed, and whilst the deferral of the reforms to April 2021 is welcomed, they suggest the government use the extra time afforded by the delay to consider fairer alternatives.

‘The off-payroll reforms build on a flawed system’

The conclusion of the finance bill subcommittee is that the IR35 rules have never worked satisfactorily, particularly when considering the complexity in determining IR35 status and HMRC’s chequered record with IR35 tribunals. The report is also critical of HMRC pushing the enforcement of the IR35 rules onto medium and large businesses as ‘effectively privatising tax compliance’, being clear that the changes put too heavy a burden on businesses.

Alternatives to the reforms

The report requests HMRC consider ‘fairer and less risky alternatives’ to the reforms. Alternatives offered include:

  • A flat rate withholding tax – this would see a flat rate deduction made by the feepayer to be later credited against a contractor’s tax liability at the end of the year, similar to the Construction Industry Scheme (CIS).
  • The creation of a Freelancer Limited Company (FLC) – this new category of limited company would place a limit on the tax efficiencies available.
  • An engagers tax / levy – this would work in a similar way to employers’ national insurance. The engager would pay an additional tax calculated as a fixed percentage of their total freelancer costs.

Zero-rights employees

Government seek to draw a distinction between employment status for tax purposes and employment status in law for the purposes of the off-payroll working rules. This sees ‘deemed employees’ pay the same tax and national insurance contributions as an employee, however with none of the benefits or protections offered by employment and all of the risks of self-employment.

The report is critical of this deeply unfair and one sided bias, highlighting government’s failure to implement the recommendations of The Taylor Report; instead pressing ahead with reforms that create ‘zero-rights employees’.  The Lords offer that the proposals outlined in the Taylor Review provide the best solution to addressing fairness in the tax system which the off-payroll working reforms purport to achieve; also suggesting that a statutory employment status test to align tax and legal employment status and bring much needed clarity is much needed.

Use the time afforded by the delays wisely

The Lords suggest that if government decide to press ahead with the private sector reforms in April 2021, they should commission an independent report into the 2017 public sector reforms, citing its failure to learn from these lessons.  They also recommend that government use the time afforded by the delay to the private sector roll out wisely to address the deficiencies in CEST and revisit its estimation of the costs of implementation of the reforms in the private sector, a figure which many have criticised as a gross underestimation.

The report is also critical of the fact that businesses were not given adequate time to prepare; with government guidance being issued only six weeks before the public sector off-payroll rules landed. The Lords recommend that government announce whether the reforms will be implemented in April 2021 by October 2020 at the latest.

The report concludes by offering six principles government should follow when considering long terms alternatives to the off-payroll working rules. Any solution should be: Certain, Simple, Fair, Supportive of growth, Administratively straight forward and Enforceable. Excellent principles that we hope government will adopt when re-considering the reforms.

It is extremely encouraging to see that the House of Lords has listened to our voice and the contractors and industry who provided evidence. However, whilst the report is highly critical of the off-payroll working reforms and strongly urges government to consider alternatives, there is no guarantee that government will take on board these recommendations.  We will continue to do our part to represent and lobby government on behalf of contractors.

Support from Parasol

As always, we'll keep you updated on any further information we hear following this review being published. If you have any questions please get in touch or speak with your account manager.