The "IR35" tax laws, used by the UK Government to tackle tax avoidance by people claiming to be self-employed, are flawed and unfair, and should be rethought before being extended to the private sector, a House of Lords committee reports today.
Due to the COVID-19 disruption, ministers put off for a year until April 2021 the planned extension of the rules, also known as the off-payroll rules, to the private sector. Peers on the Lords' Economic Affairs Finance Bill Subcommittee say they should use this extra time to completely rethink the legislation.
Following an inquiry, they conclude that the law has not worked properly throughout its 20-year history. Nor has the Government sufficiently analysed the unintended behavioural consequences of the proposed reforms. Contractors are already being laid off, despite the delay to the reforms. Many witnesses told the committee that the rules had made them "zero-rights employees", with none of the rights of being an employee, or the tax advantages of being self-employed.
Separating employment status for tax purposes from employment status under employment law, the report states, is unacceptable, "not least because it fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit".
It ads: "It is concerning that the Government has pressed ahead with the off-payroll working rules at a time when the Taylor review, which it commissioned, recommended a more holistic solution than these rules can offer. This is a solution with which the Government has said that it agrees, and on which it had launched a consultation. The lack of strategic co-ordination on this issue across Government and between departments is highly regrettable."
The committee therefore calls on the Government to keep its promise on implementing the recommendations of the Taylor review: that the taxation of labour should be made more consistent across different forms of employment, and that there should be a fair balance between tax, rights and risk.
It also believes that planned research into the impact of the reforms six months after they come into effect will be too soon to give a full and accurate picture, and that this should be delayed until 18 months after the rules have been in operation.
Committee chair Lord Forsyth of Drumlean commented: "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."
Chris Biggs, managing director of Theta Financial Reporting, however said the report might come as "too little, too late".
He explained: "From what we have witnessed in the accounting space, many hiring companies have already adapted their practices to be compliant with the new rulings that were due to come into effect on 1 April 2020. These companies have spent time, money and effort to be compliant, so it was unlikely that they would immediately revert back to old practices when the implementation was delayed. If these rules are scrapped, it could cause major disruption to companies that tried to hit the initial deadline in 2020.
"If off-payroll working rules are put on further hold or scrapped entirely, contractors and hiring companies will lose out, and the Government needs to accept responsibility for the disruption caused. More needs to be done to lay out a transparent plan so businesses and contractors, who are already going through a turbulent period, can plan for their future."