A 67-page report from the House of Lords economic affairs finance bill sub-committee, published today (April 27), said the extension of the off-payroll working rules — commonly known as IR35 — put too great a burden on businesses and was unfair on contractors.
Lord Forsyth of Drumlean, chair of the committee, said: “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 rule change, which would see the rules extended from the public to the private sector, meaning every medium and large private sector business in the UK becomes responsible for setting the tax status of any contract worker, was originally set to come into force from April 6 this year.
However last month (March 18) the government postponed the reforms in an attempt to alleviate pressure on businesses and individuals amid the coronavirus fallout.
In today’s report, the committee called on the government to use the delay to “further consider” the rules, suggesting an independent review of the IR35 in the public sector and analysis on how introducing the rules to the private sector would affect the labour market.
It also suggested the extra time should be used to consider alternatives to the off-payroll rules that were “fairer and less risky” and which did not “treat individuals as employees for tax purposes” when they did not “enjoy the rights of employees”.
Lord Forsyth said: "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.”
Any alternative to the off-payroll rules needs to be certain, simple, fair, supportive of growth, administratively straightforward and enforceable for HMRC, the report stated.
Looking at how the changes would affect the private sector if they went ahead, the report said HMRC was “imposing a heavy burden on businesses” by requiring them to determine the tax status of a contractor using a “complex, fast-specific test”.
It found the support offered by the taxman fell “well short” of what was required, adding that large- and medium-sized businesses were being made responsible for enforcing a regime HMRC had “struggled with for 20 years”. HMRC was “effectively privatising tax compliance”, the report said.
The report said the rules were also unfair on contractors as under the new rules, contractors would effectively “bear the brunt” of the client’s NI contributions in addition to their own, increased, employment taxes.
This was despite both clients and contractors driving the increase in the use of personal service companies and both benefiting from the resulting tax treatment, the committee stated.
Other findings included that flexible working by contractors was a legitimate and important part of the UK labour market which could be jeopardised by the rule change and that the distinction of separate employment status for tax purposes from employment status under employment law was “unacceptable”.
The committee also concluded the self-employed market had changed with the rise of the ‘gig economy’, and had increased the number of lower paid self-employed workers.
It said the tax system “needs to adapt to these significant labour market changes” but noted the challenges posed by these changes went “well beyond” the tax system.
imogen.tew@ft.com
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