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Off payroll working (IR35) – House of Lords releases damning review


As previously reported, the controversial changes to the off payroll working (IR35) rules for April 2020 were deferred by a year to April 2021 because of the impact of Covid-19. However in the meantime the House of Lords Finance Bill Sub-Committee has carried out a review of the changes and released a report this week.

To call the report a damning review of the state of affairs would be something of an understatement! Suffice to say that it takes on board and validates many of the views that have been submitted by those working in the gig economy, their advisers and their professional associations.

In short, they have urged the government to use the delay until next April to completely rethink the rules and make a decision by October as to whether the proposed change to the private sector from April 2021 will go ahead or be scrapped.

Many of our clients have already had to change their working arrangements in the lead up to the original April 2020 implementation date, so the deferral came too late for many of them.

Key highlights of the Lords report include the following:
  • The “IR35” system has been flawed right from its inception in 2000 and has not worked at all in the 20 years it has been with us.
  • While they understand the government’s reasoning behind the changes designed to shift responsibility for assessing status to the end clients, they have not sufficiently analysed the behavioural consequences of implementing these changes in the private sector, and the adverse impact this will have on the UK’s economy. While the deferral was welcome, it came too late for many contractors who had already been laid off due to many large companies making blanket decisions to stop using off payroll workers at all.
  • The timing for these individuals could not have been worse, as many of them will now find themselves in a position where they cannot benefit from Covid-19 business support.
  • Many individuals, although not out of work, have now found themselves in a “halfway house” situation where they are taxed as employees but effectively with few or no employment rights – the phrase the Lords committee use is “zero rights employees”
  • HMRC have hailed the public sector new rules as a “success” but this is measured in terms of additional tax revenue, and does not account for the fact that much of this additional tax will come from large companies that have made risk averse blanket PAYE decisions that will often not be strictly correct.
  • The government have proposed to review progress of the new measures 6 months in to the new rules, the Lords committee consider this should be 18 months to be able to get a proper picture of how it is (or isn’t) working.

In a particularly strong comment they point out that the new rules are making medium and large businesses responsible for enforcing a regime which HMRC has struggled with for 20 years – so effectively “privatising tax compliance”.

A number of alternative systems have been suggested over the last few years by various associations and professional bodies, and there is a message that the government should be more receptive to these alternatives. Any seriously considered alternatives should follow the six principles of certainty, simplicity, fairness, supportive of growth, administratively straightforward and enforceable.

Clearly it remains to be seen whether anything will change from the proposed April 2021 start of the new private sector rules, but it is to be hoped that the government take the advice and opportunity for a major rethink as the economy recovers from what is expected to be the biggest economic crisis since World War Two.

You can read James’ original article about off-payroll working in the private sector here.

For advice on off payroll working and IR35 please contact James Geary on or 01242 776000 to request a call back.