HMRC told to delay IR35 by more than a year and carry out wholesale reform

IR35 should be completely overhauled and delayed for more than a year due to coronavirus.

That is the conclusion of the House of Lords Economic Affairs Finance Bill Sub-Committee in a new report.

The Government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms. Contractors are already being laid off, despite the reforms’ delay.

Many witnesses told the Committee that the rules have made them “zero-rights employees” with none of the rights of being an employee, or the tax advantages of being self-employed.

Wholesale reform required

Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said:

“The Committee welcomed the Government’s decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic.

“However, our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the Government. It must devote time to analysing all of this. A wholesale reform of IR35 is required.”

Therefore, the Committee says the Government must reform IR35 to keep its promise of implementing the Taylor Review into modern working practices. This review called for the taxation of labour more consistent across different forms of employment and to deliver a fair balance between tax, rights and risk.

Extend delay, say Lords

Lord Forsyth also called for a longer delay due to coronavirus, so that businesses could prepare.

“The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year? The Government needs to think this through very carefully. We call on the Government to announce in six months’ time whether it will go ahead with reintroducing these proposals.

“Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules.”

The Committee says Government should announce by October 2020 whether it will press ahead with implementation by April 2021, or if there will be changes or further delay due to coronavirus.

The Committee also says the Government should allow the rules to operate for at least 18 months before it researches their impact. Currently, the plan is to do this after six months.

David Nunn is a former Content Manager at AAT.