UK and International Tax news
House Of Lords Publishes Report On Off Payroll Working
Friday 29th May 2020
The House of Lords has recently published its report “Off-payroll working: treating people fairly” and recommends the Government address IR35’s inherent flaws and unfairnesses.
The HL report highlights that the evidence heard over the course of their inquiry suggests that the IR35 rules, being the Government’s framework to tackle tax avoidance by those in ‘disguised employment’, have never worked satisfactorily throughout the whole of their 20-year history and appear flawed.
Until the beginning of the COVID-19 pandemic, the Government had planned to extend off-payroll working rules to the private sector in April 2020 with the new proposals designed to mirror similar rules implemented in the public sector in 2017. Under the new rules IR35 itself will not change but large and medium-sized businesses will be responsible for enforcing a regime which HMRC has struggled with.
Following the COVID-19 outbreak, and the Government’s assessment that introducing new rules was inappropriate at an extremely difficult time for the economy, the implementation of the rules have been deferred until April 2021.
The HL report welcomes this delay agreeing that it is right not to impose unnecessary burdens on business at such a difficult time. However, given the dysfunctionality of the existing system, the report calls on the Government to use the extra time to rethink fundamentally its approach to the legislation. The report refers to why, in order to improve compliance and protect the tax base, transferring responsibility for operating the rules to clients was deemed a remedy for the problems which have beset IR35. However, the report considers that the Government has made this decision after considering the issue too narrowly, in terms of its tax take. It has severely underestimated the costs to business of implementing the changes, it did not take full account of concerns raised by stakeholders, and it did not analyse sufficiently the unintended behavioural consequences of the proposed reforms or their wider potential impact on the labour market, and on the gig economy in particular.
The report suggests it is likely that the off-payroll changes will cause widespread disruption as many of the witnesses described how the proposals had already encouraged blanket status determinations and the early termination of contracts. In addition, many contractors had been left in an undesirable ‘halfway house’, because they do not enjoy the rights that come with employment, yet they are considered employees for tax purposes. In short, they are “zero-rights employees”. Separating employment status for tax purposes from employment status under employment law also fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit. The report suggests the Government should take the opportunity afforded by the delay to analyse holistically the problems that have been uncovered.
The report goes on to say if the Government continues with its plan to introduce the off-payroll reforms in April 2021, it should commission an independent review of the earlier introduction of the off-payroll rules in the public sector to analyse how introducing off-payroll rules to the private sector will affect the labour market. It should also, after two years of promising to do so, finally implement the recommendations of the Taylor Review of modern working practices. In particular, the taxation of labour should be made more consistent across different forms of employment while at the same time improving the rights and entitlements of self-employed people.
The report warns that even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of COVID-19 is so great that it would be completely wrong for the Government to impose a new burden on business in the form of the existing off-payroll proposals. Business is likely to need considerably longer than a year to recover from the disruption caused by the COVID-19 pandemic and therefore it should announce by October 2020 whether it will implement the off-payroll rules in April 2021 or whether any on-going impact to the economy resulting from the COVID-19 pandemic will require their implementation to be delayed further.
In summary the report recommends that the Government reassess the flawed IR35 framework and give serious consideration to the fairer alternatives to the off-payroll working rules which are covered in the report.
If you would like more details on the HL report, please contact Keith Rushen on 0207 486 2378.
Contact Us