IR35 is the UK Government's framework to tackle tax avoidance by those in 'disguised employment'. IR35 was to be extended to the private sector in April 2020. However, due to the ongoing COVID-19 pandemic, it has been deferred until April 2021. And during the extra time that is available, The House of Lords Economic Affairs Committee has been reviewing the reform and has urged the Government to ‘rethink fundamentally’ on the underlying off-payroll working rules.
The Government hasn’t fully analysed the consequences of the proposed reform as contractors are already being laid off, even though the bill has been deferred until next year. The committee has been further informed by witnesses that the rules have made them "zero-rights employees” since they neither have the rights of being an employee nor do they have the tax benefits of being self-employed.
On 27 April 2020, The House of Lords Economic Affairs Committee published its report into the Government’s proposed IR35 reforms, Off-payroll working: treating people fairly.
In the report, the Committee has called on the Government to revisit the Taylor Review’s recommendations that set out alternatives to off-payroll working reforms, thereby making taxation more consistent across different forms of employment alongside maintaining a balance between tax, rights and risk. These are as follows:
- A flat-rate withholding tax on payments to contractors (similar to the Construction Industry Scheme).
- Imposing a levy, similar in operation to employer’s NIC, on expenditure on contingent labour.
- Aligning the NIC regime for the self-employed with that of employees; and
- Introducing a statutory employment test to give more certainty on employment status.
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? The Government needs to think this through very carefully. We call on the Government to announce in six months' time whether it will go ahead with reintroducing these proposals.”
"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. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules."
The committee also recommends that the Government should announce by October 2020 whether or not the intended introduction of the IR35 rules for the private sector will be going ahead in April 2021 as currently planned or not so that individuals can plan out accordingly.