House of Lords committee reveals IR35 concerns

The House of Lords committee looking at the proposed extension of IR35 regulations to the private sector has written to the Treasury with a list of damning concerns about the proposed reforms.

The extension to the off-payroll working rules, due to come in on 6 April, was postponed last month due to increased business uncertainty caused by the coronavirus pandemic. The legislation is now expected to take effect on 6 April 2021.

Announcing the deferral, Treasury secretary Steve Barclay said “this is a deferral not a cancellation” and reaffirmed the government’s commitment to extending the rules, which make employers liable for ensuring that contractors working through limited companies pay the right levels of tax and National Insurance.

Members of the House of Lords finance bill sub-committee, led by Lord Forsyth of Drumlean, had been conducting a review into the legislation and have now produced their recommendations and set out a number of questions for the Treasury to answer.

The committee’s concerns include the cost to businesses in preparing for the reforms, the potential for contractors to lose business or face declining rates, and whether stringent limits on the use of contractors could hamper the labour market as employers try to flex-up work and rebuild business once the coronavirus crisis is over.

The letter says: “Contractors have told us that the coronavirus pandemic means that they do not expect to win new business in the next few months. How will the government support these people? Will they be compensated for any business lost because companies terminated contracts in anticipation of the implementation of the new rules in April 2020?”

It adds: “The government’s decision to delay the implementation of the reforms seems to acknowledge that the reforms indeed represent a significant additional burden for business, one that they will be unable to shoulder during the present crisis. Is this a fair assessment?” It also questions whether businesses will have recovered enough from the impact of the pandemic by April 2021 to bear the additional burden of managing off-payroll working rules.

The committee challenges the Treasury on whether the introduction of IR35 reforms to the public sector in 2017 proved successful, with many employers imposing blanket determinations on contractors and losing important workers as a result. It asks the government how it will identify businesses who are making blanket assessments that could lead to reduced pay or even moving work offshore.

The committee also demands of the government:

• How it will police the use of non-compliant umbrella companies who may be using “disguised remuneration schemes”, and whether there should be a higher degree of regulation of these companies.
• Whether it will improve the reliability of its Check Employment Status for Tax (CEST) tool, which committee witnesses described as “discredited”, in particular around the fact it fails to reflect mutuality of obligation, a key employment status test.
• Why it had not consulted the Office for Tax Simplification on the most recent review of the proposals. “Why was this? How precisely will these proposals help to simplify the tax system?”, the letter says.
• Whether the planned reforms were a good fit with the government’s aims to support the gig economy and do “whatever it takes” to support UK businesses to emerge from the coronavirus crisis.

The letter also expresses a concern that the development of the reforms began before the government implemented the Good Work Plan, which followed from the recommendations of the 2017 Taylor Review.

The Taylor Review argued that determining employment status should be simplified, particularly around the sometimes conflicting legal parameters around employment status for tax and status for employment rights. The findings of a 2018 consultation into this are yet to be published.

The letter adds: “What assessment has the government made of whether those engagers with contractors who are treated as employees for tax purposes but not for employment rights will cancel contracts rather than keep contractors on under the Covid-19 job retention scheme?

“If such contractors have been using PAYE, will they be able to benefit from any measures that the government puts in place to protect self-employed people during the coronavirus outbreak?”

Finally, it challenges the government on whether “the strategy of treating contractors and freelancers as employees for tax purposes, but not for employment rights purposes” could have a negative impact on innovation and flexibility in the workforce as companies emerge from the current crisis.

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“How will any such diminution enable the UK workforce to respond in the short term to the economic impact of Covid-19, and in the longer term to the challenges of the Fourth Industrial Revolution?” it concludes.

The committee has asked for a response from the government in 10 working days.