Call for wholesale reform of ‘flawed’ IR35 rules

A House of Lords committee report reviewing planned changes to the IR35 off-payroll working rules is calling for a complete overhaul of what it dubs the ‘inherent flaws and unfairnesses’ in the legislation

As a result of the Covid-19 pandemic, the government has deferred by a year its plans to extend the off-payroll rules reforms already implemented in the public sector to the private sector.

The House of Lords economic affairs finance bill sub-committee says it should now use this extra time to completely rethink the legislation.

Its review concluded that 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.

In its recommendations, the committee says the government must do more to speed up implementing proposals from the Taylor Review, which stated that the taxation of labour should be made more consistent across different forms of employment, and that there should be a fair balance between tax, rights and risk.

The committee suggested that rather than look at IR35 in isolation, the government should give consideration to a wider overhaul of how to make treatment of workers, employees, the self employed and contractors more consistent.

During the passage of the Finance Bill, the government intends to legislate to carry out external research on the impact of the IR35 reforms six months after they come into effect. The committee consider this is too soon to give a full and accurate picture, and wants this research done 18 months  after the rules have been in operation.

Lord Forsyth of Drumlean, chair of the House of Lords economic affairs finance bill sub-committee, said: ‘The committee welcomed the government's decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic.

‘However, 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.

‘The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year?’.

Amongst the committee’s recommendations is the requirement for the government to commission an independent review of the introduction of the off-payroll rules in the public sector and undertake an analysis of how the move will affect the labour market.

In addition, the delay provides time to tackle what the committee identified as  the ongoing deficiencies of the check employment status tool (CEST) and the status determination process, and to revisit the government’s assessment of the costs to business of the proposals, which it claimed  were significantly underestimated.

To give certainty to business, the committee said the government should announce by October 2020 whether it will indeed implement the off-payroll rules in April 2021, or whether any on-going impact to the economy resulting from the COVID-19 pandemic will require their implementation to be delayed further.

Susan Ball, RSM tax partner, said: 'If the government takes the report recommendations onboard it needs to make sure any change should ensure certainty; simplicity, both in terms of its overall coherence and the way in which it is administered; fairness; that it supports growth, and; that it is enforceable.

This will give everyone a chance at applying the principles correctly. Any guidance should also be published more than six months, rather than six weeks, before commencement to allow consumption.’

Ball also said that the move could mark the start of a potential complete rethink on how the tax system operates for the self-employed and IR35 contractors, pointing out that the Chancellor hinted as much in March when including these groups in the coronavirus support packages.

‘If there was ever a time to get through a major overhaul of the tax system it is after the biggest crisis the economy has faced since the second world war. The recommendations in the Taylor Review of a statutory test for employment and worker status therefore looks more likely,' she said.

Off payroll working: treating people fairly is here.

By Pat Sweet

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