On Monday 27th April, it was confirmed during the daily House of Commons proceedings that the private sector IR35 reform will be implemented on 6th April 2021 – a year to the day of its first deadline. This comes alongside a damning report from the House of Lords on the “new” off-payroll rules, published the very same day.
The Lords have previously published comments against Making Tax Digital, a report condemning the Loan Charge, and a call to evidence against the IR35 reform over the last 18 months. While these releases usually reflect general industry opinion on the given topic, it’s simply guidance for the Government to apply however they see fit.
What points were raised in the House of Lords report against the IR35 reform? Can we expect to see significant changes from their comments? Is there the possibility of another delay to the new off-payroll rules?
What are the central comments from the House of Lords IR35 report?
The private sector IR35 reform has been a source of contractor concern since it was announced back in 2018, following the roundly criticised public sector reform in 2017.
Contractors typically benefit from income tax relief due to not receiving employee benefits like holiday and sick pay or a pension, in addition to covering overheads like providing their own equipment. The IR35 legislation acts to decide if a contractor is genuinely self-employed or is simply looking for a quick-win increase in their take-home pay via this tax relief.
This reform essentially shifts the responsibility of deciding a contractor’s employment status (i.e. whether they’re genuine or not) from the contractor themselves to the end client. If you’re not already familiar with IR35 and what it means for contractors, you can read more about it here.
The overarching theme of the Lords’ report, titled “Off-Payroll Working: treating people fairly“, tackles the “flawed IR35 framework” and strongly advises that HMRC consider all other alternatives to the off-payroll rules as they are currently. Warnings that the government has looked at the issue “too narrowly”, and that “it has severely underestimated the costs to business of implementing the changes” are abundant throughout.
“Our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences”, said Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee. “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.”
“Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions”, he continues. “Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules.”
Lords urge Government to adopt Taylor review recommendations
The Lords’ report urges the government to adopt the recommendations of the Taylor review, a government-commissioned independent examination of modern working practices in the UK.
The Taylor review proposes that the taxation of labour should be consistent across different forms of employment, while at the same time improving the rights and entitlements of self-employed people. The Lords’ IR35 report states that “We believe that the Taylor Review proposals offer the best long-term alternative solution to the off-payroll rules, and provide an opportunity to consider tax, rights and risk together.”
It’s also been strongly suggested that the “Government commission a similar independent review into how the off-payroll working rules have affected the public sector before implementing the reform in 2021.”
The report reads: “Even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of Covid-19 is so great that it would be completely wrong for the government to impose a new burden on business in the form of the existing off-payroll proposals.”
“However, business is likely to need considerably longer than a year to recover from the disruption caused by the Covid-19 pandemic. The government should announce by October 2020 whether it will indeed implement the off-payroll rules in April 2021, or whether any ongoing impact to the economy resulting from the Covid-19 pandemic will require their implementation to be delayed further.”
Can we expect any significant changes to the IR35 reform?
While the House of Lords is a widely respected committee and their report on the IR35 reform is well-researched including testaments from several experienced limited company contractors and recruitment agencies, their recommendations hold no legal sway over the course HMRC decides to take.
“Regarding the House of Lords report, the Committee appears to have taken on board all the evidence and understood it completely”, reflects Andy Vessey, Head of Tax at Kingsbridge. “The off-payroll rules are not the right solution and they are not fair as they currently stand. However, the Government will desperately need tax revenue when we get through this pandemic and, from that standpoint, I do not see them radically moving from their current position.”
“HMRC will no doubt argue that it would be unfair to the public sector and taxpayers alike to abandon the course that they are on”, Vessey, who is also an ex-HMRC inspector, continues. “Depending on where the economy is by late autumn, we might see some tweaks. However, for the time being, there is no suggestion of any significant amends being made and you should continue to prepare as if the reform is cemented to go ahead in its current form.”
A Treasury spokesperson, when asked for their take on the Lords’ suggestions, stood by the current iteration of the IR35 reform.
“It is right to ensure that two individuals sitting side-by-side and doing the same work for the same employer pay the same tax and national insurance contributions”, they said. “Those who don’t comply with the off-payroll working rules pay significantly less income tax and NICs than an equivalent employee, and the cost of this non-compliance deprives our public services of vital funds.”
Could the private sector IR35 reform be delayed again?
Speaking at the second reading of the Finance Bill, Jesse Norman, Financial Secretary to the Treasury, said the government will introduce an amendment to the bill “in due course” to legislate for the new start date next year.
“Taxes are rarely popular or straightforward, but they are necessary to support our public services”, Norman stated. “Now, more than ever, the government has a duty to ensure that the rules are applied correctly”.
He went on to reiterate that the government is “fully committed to introducing these reforms to ensure that those working like employees but through their own limited companies pay broadly the same tax as individuals who are employed directly”. However, he did pledge that the government will use the additional time to commission further external research on the public sector off-payroll implementation, with the intention that that research will be available before the reforms come into effect in the private sector in 2021.
Judging from those comments, it’s looking unlikely that the reform will once again be postponed – provided, of course, we don’t experience another set of exceptional circumstances next April.
How can I prepare for the IR35 reform?
Nicola Hayman, Legal Manager at Kingsbridge, urges recruiter and contractors to also use this extra year wisely when getting ready for the reform.
There is a significant opportunity for recruiters and contractors to use this extra time to invest in proper education around the legislation, she says. Work to develop a clear path to a solution that maximises your ability to retain your contingent workforce outside IR35 and minimise client costs, rather than adopting the panic measures that some were being forced into.
“Even when using HMRC’s calculations, the vast majority of PSC contractors are genuinely self-employed – but processes must be put in place to ensure this talent pool can be used in a compliant way, backed by insurance for extra peace of mind”, Hayman continues. “Now, more than ever, businesses will need to rely on flexible workforces to adapt to demand in an uncertain market – and April 2021 will be here before we know it.”
For the time being, the delay to the reform dictates that contractors must determine their own employment status for another year – this means that the liability of a wrong determination still sits with you as the contractor for that time too. It’s crucial that you understand your IR35 position with every contract you take on.
Getting a professional contract and working practices review is pivotal to making sure you know where you stand, while IR35 investigation insurance is also a worthy investment and can provide a lifeline should you fall foul of an HMRC enquiry.
A good policy will include an IR35 status review, as well as cover unpaid tax debts, interest, fines, and legal fees, and will flex with the reform roll out to cover the contractor, recruiter, and end client. Our IR35 Protect product offers the above in one comprehensive package.
