Representing members views on IR35 to the House of Lords
By Charlotte Barbour, Director of Taxation
30 April 2020
Charlotte Barbour, Director of Taxation at ICAS is pleased to note that ICAS evidence – both oral and written – features in the House of Lords Finance Bill Sub Committee Report into the government’s proposal to extend the off-payroll working rules to the private sector.
The House of Lords Economic Affairs Committee Finance Bill Sub-Committee (FBSC) has a remit to inquire into the draft Finance Bill. The FBSC's inquiries focus on technical issues of tax administration, clarification and simplification rather than on rates or incidence of tax. This year it decided to examine the government’s proposal to extend the off-payroll working rules to the private sector.
ICAS evidence
ICAS was asked to give evidence to the FBSC; both written evidence which the Employment Taxes Working Group and the Tax Board oversaw, and oral evidence was given by Justine Riccomini, Head of Taxation (Scottish Taxes, Employment & ICAS Tax Community).
Report findings
The FBSC issued its report on 27 April 2020 and its summary includes the following:
‘…. the evidence that we heard over the course of our inquiry suggests that the IR35 rules— 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. We therefore conclude that this framework is 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. The off-payroll working rules build on IR35, and the new proposals were designed to mirror similar rules implemented in the public sector in 2017. Under the new rules IR35 itself will not change. Instead, large- and medium-sized businesses will be responsible for enforcing a regime which HMRC has struggled with.
The government’s aim was to legislate for the new private sector rules in this year’s Finance Bill. But 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 will be deferred for a year. We welcome this delay. It is right not to impose unnecessary burdens on business at such a difficult time. However, given the dysfunctionality of the existing system, we call on the government to use the extra time to rethink fundamentally its approach to the legislation.’
‘We also heard that many contractors had been left in an undesirable ‘halfway house’: 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”.’
‘The government should therefore take the opportunity afforded by the delay to analyse holistically the problems that we have uncovered. …. It should also, after two years of promising to do so, finally implement the recommendations of the Taylor Review of modern working practices: that 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. We believe that the Taylor Review proposals offer the best long-term alternative solution to the off-payroll rules, and provide an opportunity to consider tax, rights and risk together.’
‘The government should announce by October 2020 whether it will indeed 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 the longer term the Government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off-payroll working rules which we lay out in this report.’
ICAS policy positions
ICAS welcomes this examination of the topic and the report. As Justine said in her evidence “IR35 was conceived 20 years ago. It was a sickly child when it was conceived, and I do not think it has got any better along the way.”
In its Policy Positions, ICAS tax has said:
- Government policy should be consistent across employment law and taxation
- Taxation of employed and self-employed workers should be more closely aligned
- Responsibility for tax compliance should be aligned with those most able, and resourced, to do so
- Boundaries between employment and self-employment should be accurately defined
- Workers supplying their services in the same way should be taxed in the same way, while permitting flexibly of business vehicle.
The FBSC report adds to the sense that the area of the tax system around income tax and national insurance needs to be more widely reviewed and the distortions addressed. An individual worker may prefer to be self-employed rather than employed because NICs will be lower and the expenses rules are more generous. Lower corporate tax rates and lower taxation of dividends incentivise many businesses to incorporate. This needs to be addressed, as does the cost of employer NICs. Also, the cost of employer NICs is key to exploitative practices in the gig economy and to illegal modern slavery.