House of Lords release damning report on IR35

The Finance Bill Sub-Committee of the House of Lords Economic Affairs Committee yesterday published it’s report: “Off-Payroll working: treating people fairly”. The findings and recommendations can be summarised as follows:

  • It is right that everyone should pay their fair share of tax but IR35 is a flawed means of achieving that objective in the context of contractors and their Personal Service Companies (PSCs). The IR35 rules have never worked satisfactorily and HMRC have struggled to enforce them throughout their 20 year history. The existing regime is dysfunctional.
  • The Government was right, at this extremely difficult time for the economy following the COVID-19 outbreak, to postpone by one year the extension of the Off-Payroll working rules to the private sector.
  • Given the dysfunctionality of the IR35 regime, the Government must use the extra time to carry out a fundamental review of the legislation.
  • The review should consider (i) the wider issues (not just the tax take), (ii) the costs to business of implementing the changes, and (iii) unintended behavioural consequences for the labour market (in particular, the gig economy).
  • The review should also consider problems that have arisen from the implementation of the Off-Payroll working rules in the public sector, such as blanket status determinations, the loss of vital contractors who have migrated to the private sector and the unsatisfactory operation of the Check Employment Status for Tax (CEST) online tool. In particular, CEST does not give an answer in a substantial minority of cases, it does not reflect some important aspects of the case law and concludes that employment status applies in cases where it does not.
  • Perhaps above all, the review should implement the recommendations of the Taylor Review of modern working practices and achieve a better alignment of tax and employment law. The Sub-Committee heard that many contractors had been left in an undesirable ‘halfway house’, in which they did not enjoy the rights that come with employment but were treated as employees for tax purposes. In short, they are ‘zero-rights employees’.
  • Finally, the review should consider the alternative systems discussed in the report. These are (i) a flat rate withholding tax, (ii) the freelancer limited company, (iii) an ‘engager’s tax’, (iv) income tax / National Insurance Contributions (NICs) alignment, and (v) a statutory employment test.

This report will make very uncomfortable reading for the Government and HMRC!