There should be no further delay in addressing the long-standing ‘unfairness’ of contractors paying less tax than employees in situations where their work should be classified as an employment relationship, the government has said.
In their response to the House of Lords report into off-payroll working in the private sector, which found the IR35 rules were “riddled with problems, unfairnesses and unintended consequences”, HM Revenue & Customs and the Treasury said bogus self-employment is an issue that the government cannot delay addressing any further, as it resulted in the loss of revenue for public services.
The reforms to off-payroll working rules in the private sector were due to take effect in April 2020, but have been delayed until 6 April 2021 to reflect the uncertainty caused by the coronavirus pandemic.
However, in April, the House of Lords economic affairs finance bill sub-committee suggested that the government should have waited until October to announce that the reforms would be brought in in April 2021, when the impact of Covid-19 on business may be clearer.
In response, HMRC and the Treasury said: “At the time of the delay, many businesses would have been prepared for this change to take place.
“It is vital, in the current conditions, that businesses and stakeholders have clarity over the timing of the implementation of the reform, and the final legislation, so they can prepare in a timely fashion. Waiting until October to confirm whether it will be implemented would create uncertainty.”
It has since been confirmed that the changes will take effect next year, after MPs voted against an amendment to delay them for at least 2023-24.
“Indeed, any additional delay would have significant drawbacks; it would not address the fundamental unfairness of taxing two people differently for the same work, and it would further prolong the disparity between the private and voluntary sectors and the public sector, where the rules have been in place since 2017,” the government’s response says.
They can make as many assurances as they want – the legislation is set to have a hugely damaging effect on contractors, the firms that hire them and the economy as a whole” – Dave Chaplin, CEO of ContractorCalculator
“There is a risk that this continuing disparity could begin to cause retention difficulties in the public sector, as contractors may choose to accept only private sector contracts, as well as being unfair to contractors working in the public sector.”
It says it has created a dedicated team to educate and support businesses and individuals affected by the IR35 changes and has completed almost 950 calls with medium and large organisations, held 10 webinars and sent 59,500 letters explaining the changes to the rules.
“This team is currently conducting a comprehensive evaluation of the education and support package offered during 2019/20, including collating feedback directly from organisations. The extra time afforded by the delay will be used to complete this evaluation. This will be used to inform the design of an enhanced programme of targeted support ahead of April 2021,” the government says.
It disagreed with the Lords’ committee’s view that the Check Employment Status for Tax tool was “not fit for purpose” and said it had made significant enhancements to the tool since it was introduced in 2017.
It said it intended to make the independent research it commissioned into the effects of the 2017 reforms of off-payroll working in the public sector available before April 2021 and would give careful consideration to the results.
“As with all areas of tax policy, if the research suggests that there are any implementation difficulties or any areas where further support is necessary, the government will consider further action to address these concerns. This sits alongside the ongoing work HMRC are doing to evaluate and enhance its education and support offer ahead of implementation in April 2021,” the report said.
Dave Chaplin, CEO of ContractorCalculator, said the government’s response lacked substance and said its promises to help businesses to prepare were too “light”.
“It would appear that the threat of losing the vote on the tabled amendment resulted in the Treasury and HMRC having to make considerable assurances that the implementation would not have an adverse effect on the UK’s valuable private sector workforce,” he said. “They can make as many assurances as they want – the legislation is set to have a hugely damaging effect on contractors, the firms that hire them and the economy as a whole.
“As for its comments on CEST, it is staggering that the government continues to spout out the same debunked messages that the tool has been robustly and rigorously tested. Everyone knows, from FOI requests, that they do not hold any detailed evidence to prove their claims. It’s interesting to note that mutuality of obligation was not even addressed – it’s a key element of case law and it was omitted from CEST.”