Lords Inquiry Makes Headway in IR35 Muddle

4th March, 2020
By 4. March 2020IR35
Lords Inquiry Makes Headway in IR35 Muddle

In a week that’s seen many contradictory messages about the off-payroll reforms, the House of Lords inquiry at least looks to be making some headway. While the new Chancellor promised that the government would go easy introducing the new rules, there’s already strong evidence to the contrary.

Last week, the Treasury published the results of its Off-Payroll Review, which confirmed that the reforms would go ahead as planned. Despite some minor concessions, the review overlooks serious issues, dismissing the current PSC ban adopted by many companies as simply a result of businesses reviewing and restructuring their business model. This poses a serious question for contractors regarding the feasibility of continuing to operate through their limited companies.

Speaking at a London Think Tank event, ex financial secretary David Gauke said that it was unlikely that there would be any watering down of the IR35 reforms ahead of their introduction to the private sector in April. In a discussion that examined the options open to new Chancellor Rishi Sunak when he presents his first Budget to Parliament this month, Gauke commented:

“There is a very big distortion in our tax system and it’s going to be a growing problem. It’s going to reduce revenue for the exchequer. There is no justification for the way different people are taxed for doing essentially the same things.”

Despite sounding close to official government rhetoric, few people would dispute Gauke’s suggestion that deliberate tax avoidance should be tackled. Those opposed to the reforms aren’t suggesting that distortions in the system shouldn’t be dealt with; rather, it’s the government’s claims about the scale of the problem and their proposed means of addressing it that’s the issue.

The Lords inquiry quickly appeared to highlight that, rather than addressing unfairness in the tax system, the off-payroll reforms are in fact creating far greater distortions when it comes to the proper collection of tax revenue.

Insights were shared with the Finance Bill Sub-Committee just hours after Rishi Sunak made his ill-advised promise that the government wouldn’t be “heavy handed.”

Evidence of the resulting exploitation of contractors is already widespread, with attendees hearing about how the government’s lack of communication with those affected by the reforms has caused significant damage. It was also suggested that HMRC’s inadequate understanding of the temporary labour market has resulted in scant or overly complicated information for businesses.

FCSA chief executive Julia Kermode presented damning straw poll figures from a 19 February 2020 HMRC webinar for businesses preparing for the off-payroll reforms. These found that 50% of businesses are not confident in making status determinations; 49% haven’t taken any steps to prepare for the off-payroll reforms, while 41% don’t know how many individuals they currently engage through an intermediary.

The inevitable upshot of this confusion has been panic and widespread non-compliance by firms as they attempt to protect themselves against exposure to tax liability. Andrew Chamberlain of the IPSE said their figures showed that 39% of contractors’ end-clients weren’t prepared to assess individual engagements, instead adopting a blanket approach.

Experts also noted that the government’s proposed client-led status disagreement process would only further increase the imbalance of power. Lord Forsyth summarised the disadvantaged position of contractors as “David versus Goliath, but without the slingshot.” Attendees stressed the need for independent arbitration in settling IR35 status disputes fairly.

The rushed implementation of off-payroll reforms has also been at the expense of government’s Good Work Plan. While the government have previously declined to consider workers’ rights as part of the IR35 debate, Lord Bridges put his finger on the problem, commenting with apparent disbelief: “If I’m someone who’s affected by IR35, I’m going to be…treated in tax terms in one way, and employment rights in another way. Am I right in saying government needs to get a lot better joining up these facts?”

The sheer volume of issues has led experts to unanimously agree that the legislation is unworkable. HMRC has consistently deferred on these issues in favour of insisting that reform in the public sector was successful by virtue that more off-payroll tax revenue was collected. However, Julia Kermode pointed out a probable misrepresentation here, noting: “This doesn’t demonstrate an increase in compliance. It simply demonstrates an increase in people being put on a payroll.”

Chairing the inquiry, Lord Forsyth revealed that many more individuals than he was expecting have come forward to ask for protection from the reforms. He stated with concern: We’ve already had 300 emails, which suggests to me there’s real pain out there. I’ve been very, very surprised by the extent which this inquiry has provoked a reaction.”

Even at this relatively early stage of the inquiry, there’s strong evidence that the government should halt the reforms in favour of further consultation. Yet ominous comments in The Commons from ex Chancellor Sajid Javid more than hinted that even the Treasury, acting in its objective and advisory capacity, is being increasingly compromised.

Javid, who recently resigned after the Prime Minister ordered him to replace his advisors, warned against the increased control that the government is seeking to establish over the Treasury. As media coverage showed peculiar footage of Sunak and the rest of the reshuffled cabinet playing ‘repeat after Boris,’ it’s clear that the off-payroll reforms, along with many other things, might not be up for genuine debate.

This content has been supplied by IR35 Guru.

If you’ve been affected by the Off-Payroll reforms, or if you’re unsure about your employment status, ContractingWise has a range of options to help you keep your contracting career on track. To talk to a member of our team, call: 0203 642 8679