Out-Law News | 29 Apr 2020 | 4:26 pm | 4 min. read
The UK's private sector IR35 off-payroll working rules due to be introduced in April 2021 are "riddled with problems, unfairnesses, and unintended consequences" according to the chair of the House of Lords Economic Affairs Finance Bill Sub-Committee.
Lord Forsyth of Drumlean was commenting as a report by the sub-committee into the new rules was published.
The IR35 rules require that employment taxes be paid by people who provide services through a personal service company (PSC) if that person would otherwise have been regarded as an employee of the engaging business. Currently, where a private sector business engages a contractor through a PSC, liability to decide whether IR35 applies and to pay any employment taxes rests with the PSC.
The rules are due to change from 6 April 2021. From this date, engaging businesses will be made liable for determining whether the IR35 rules apply. They will also be required to operate PAYE and pay employers' National Insurance contributions. The changes will not apply to small businesses which engage contractors through PSCs.
The changes were originally due to take effect this April, but the start date was delayed a year as a result of the coronavirus pandemic.
The sub-committee calls on the government to use the delay in implementing the rules to "rethink fundamentally its approach to the legislation". The report says that in bringing forward these changes the government has considered the issue too narrowly, focusing on the increased tax from the reforms. It says the government has severely underestimated the costs to business of implementing the changes and has not taken sufficient account of the unintended behavioural consequences of the proposed reforms or their wider potential impact on the 'gig economy'.
"The sub-committee's comments are not entirely unsurprising and echo criticisms of the rules that have been repeatedly voiced by stakeholders for many months now and well before the coronavirus pandemic," said Penny Simmons, a tax expert at Pinsent Masons, the law firm behind Out-law.
Although the report welcomes the government's decision to defer the reforms as a result of the coronavirus pandemic, it suggests that a longer deferral than to April 2021 may be needed as it says that business is likely to need considerably longer than a year to recover from the disruption caused by the pandemic.
The report recommends that, to give certainty to business, the government should announce by October whether it will implement the rules in April 2021, or whether any ongoing impact to the economy resulting from the pandemic will require their implementation to be delayed further.
However, it seems that the government does not currently intend to delay the introduction of the rules. In the debate on the second reading of the Finance Bill on 27 April, Jesse Norman, the financial secretary to the Treasury said that the government will introduce an amendment to the Finance Bill "in due course" to legislate for a new commencement date of 6 April 2021.
"If the government is going to include the legislation in the current Finance Bill, significant amendments to the rules will be difficult," Simmons said.
Chris Thomas, another tax expert at Pinsent Masons, said: "While there is clearly a case for further consideration of the impacts of the proposed changes, any decision also needs to take into account the significant number of engagers who did - as they were told to do - implement new policies and processes in preparation for April 2020 and have already been somewhat left in limbo. Any further delay, or changes to the regime, runs the risk of introducing even more work and uncertainty for such businesses".
Public sector engagers, such as the NHS and the BBC, have been responsible for IR35 compliance since April 2017.
The parliamentary subcommittee heard evidence that in some parts of the public sector, including the NHS, the off‑payroll working rules were not applied properly. As a result of blanket assessments, it says, contractors are likely to have been miscategorised and taxed incorrectly with some contractors having ceased working in the public sector altogether, causing recruitment and retention problems.
The subcommittee called for the government to undertake an independent review of the implementation of the off‑payroll rules in the public sector and an analysis of the impact of those rules on the labour market, before implementing the rules in the private sector.
In response, Jesse Norman said in the Finance Bill debate: "The government will use the additional time to commission further external research into the long-term effects of the reforms in the public sector, with the intention that that research will be available before the reforms come into effect in the private sector in April 2021."
The subgcommittee heard evidence that the private sector IR35 proposals have already encouraged blanket status determinations and the early termination of contracts. The report says many contractors are being left in an undesirable ‘halfway house’ as 'zero-rights employees', not enjoying the rights that come with employment, yet being considered employees for tax purposes.
The report says that the tax system needs to adapt to the changes in the labour market over recent years and in particular, the growth of the gig economy. However, it says that the challenges posed by these changes go well beyond the tax system and trying to address them from a tax perspective alone is unlikely to deliver the optimal solution.
In 2017 a review commissioned by the government into modern working practices and chaired by Matthew Taylor, chief executive of the Royal Society of Arts, concluded that the government must update employment laws to better reflect modern working practices and to "provide the foundations of fair and decent work".
The House of Lords subcommittee recommends that the government should carry forward its work on the Taylor Review, to develop the review’s ideas into legislation which works across both tax and employment law.
"A more holistic review of employment status issues is certainly overdue, and it is right to focussing only on tax is likely to be counter-productive," Chris Thomas said. "However, given that the government had already put wider reform into the 'too difficult' pile, it is difficult to see that changing. There will also be an enormous black hole in the government's finances, following the current crisis, which may again make it reluctant to defer these changes pending a wider review."
The subcommittee also said it agreed with witness evidence that that the support offered by HM Revenue & Customs (HMRC) in determining employment status and HMRC's CEST tool in particular falls "well short of what is required".
CEST is the government's check employment status online tool. It has been criticised in particular for the way it fails to deal with the concept of 'mutuality of obligations' which is found in some case law.
"We question whether the CEST tool as currently constituted is fit for purpose. It offers limited assistance to businesses, which need to spend considerable time and money clarifying the status of their contractors as a result," the report says.