The House of Lords has released a withering report on the UKs planned reshape of the off payroll tax laws, warning the government that it should rethink the “flawed IR35 framework” and take time to seriously consider all alternatives to the recently delayed tax regime change.
IR35 rules would utterly change the UK’s off payroll tax collection and move the onus of tax status determination to the firms that hire contractors. The redesigned tax rules were expected to come into force on April 6, the start of the UK’s tax year. However, like most things a delay of the rule implementation has been put in place due to the COVID-19 outbreak.
The House of Lord’s report warns that the government looked at the issue “too narrowly” and that “tt has severely underestimated the costs to business of implementing the changes. It did not take full account of concerns raised by stakeholders. And it did not analyse sufficiently the unintended behavioural consequences of the proposed reforms or their wider potential impact on the labour market, and on the gig economy in particular.”
The Lords are urging the government to make good use of the delay and analyse the problems that are contained within the tax reform. It believes that by October 2020 the government should announce whether or not it will implement the changes in April of 2021 as now planned.
The House of Lords took evidence from multiple sources including several IT contractors who consistently expressed their concerns that the incoming rules have already fundamentally changed how they approach public sector jobs (the rules have applied to the public sector since 2017) and who gave evidence that a sustained brain drain is already taking place.
See also: Senior IT Workers Pack their Bags, as Fresh Research Points to £2 Billion IR35 Productivity Gap
Andy Ong, an IT consultant who used to work on large public sector projects, told the committee that: “Part of the risk we accept living the life of a contractor, in that we forego our employment rights/benefits, such as holiday pay, sick pay, paid maternity/ paternity leave, pension, bonus, company healthcare schemes, right to strike, right to training/professional development, unfair dismissal, etc. for the single purpose of being able to take home more money while we are in contract (of which we often spend months out of contract depending on market conditions with no income or help)”.
Ong makes it clear that IR35 drove a brain drain away from pubic sector projects. He told the Lords that he finished working on a large public sector contract in 2016, found a private contract and since then has “never even considered other public sector contracts.”
IT consultancy firms also expressed their concern about the rules noting they are subject to blanket assessment when it comes to off payroll employees and that public sector organisations were not: “considerate of the individual circumstances of businesses they contract”
Amritpal Gill owner of an IT consultancy firm Hayachi Services stated that IR35 “in effect, it meant a total submission of control and a rate cut to boot … and concern over future assessments or investigations meant we would rather not risk [working for public sector organisations].”
IT contractors have warned the rules see them working under “umbrella” companies which essentially make them employees of a company that was not providing them with any of the benefits that status bestows.
Colin George a freelance IT contractor for 22 years told the committee: “I was recently informed that my current contract cannot run past the end of February 2020. It seems that if I wish to continue providing services to the credit insurance company from March onwards then I would have to operate via an umbrella company, forcing me to become an employee with no employee rights—the worst of both worlds. I would be an employee of the umbrella company, and yet all employer and employee NI, PAYE, etc., would be deducted from the fees that I earn—how can that be fair?”
The House of Lord’s report warns that these workers run the risk of becoming ‘zero-rights employees’. Workers who will have separated employment status for tax purposes from employment status under employment law […] bear all the risk for providing the workforce flexibility from which both parties benefit.”
The report recommends that the government adopt the recommendations of the government commissioned Taylor review of modern working practices which put forward that the taxation of labour should be “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.”