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The Government has released its inadequate response to the damning House of Lords report into IR35 reform, in which most of the concerns raised by the Finance Bill Sub Committee in their investigation were ignored.
This document - in which the Government delivers a predictable response to the constructive House of Lords report - was published on 1st July. On the same day in Parliament, MPs voted against a further delay to the reform, effectively confirming the 2021 rollout of changes to the private sector.
In this article, we’ll take a close look at the points the Government responds to, what has been overlooked and what the promises made in the document mean, if anything, regarding the IR35 legislation itself and the introduction of off-payroll reform next year.
After thanking the Finance Bill Sub Committee for carrying out the investigation into IR35 changes, the Government recites familiar rhetoric, emphasising the apparent need for reform. It cites “widespread non-compliance” and the estimated cost of this to the Exchequer, which it says will reach £1.3bn per year by 2023/24.
A number of specific points raised in the House of Lords report are then focused on.
Calls to delay IR35 reform announcement overruled
Due to COVID-19, the Lords advised the Government to wait until October 2020 before announcing reform in the private sector, which we now know will certainly arrive on 6th April 2021.
However, the Lords’ argument was rubbished by the Government, that said it has “been clear” about its commitment to rolling out the changes next year and that businesses need certainty. It said any further delay would also fail to address the “fundamental unfairness” that currently exists, which would also impact the public sector where the reform was enforced in 2017.
At this point, the “light touch” due to be taken by the Government for the first year following the changes was referenced. By not handing out penalties (but not tax liabilities) to private sector firms for non-compliance, HMRC is of the view that businesses will be better-placed to cope with the reform. However, as highlighted numerous times by Qdos, this is a red-herring and must not stop companies from preparing fully and ensuring their IR35 compliance.
The Government responded to the Sub Committee’s recommendation that work is carried forward on the Taylor Review, which called for a number of legislative changes to improve clarity and certainty regarding employment and employment status.
It pointed towards a number of reforms introduced as part of the Government’s Good Work Plan, which was published in response to the Taylor review. These changes included the right that all workers now have to receive a statement of core terms, along with the closing of a loophole which sees agency workers often engaged on cheaper rates than employees.
However, the elephant in the room - the issue of ‘zero-rights employment’ - was all but ignored in this response. The Sub Committee made clear their feelings that by rolling out IR35 reform, the Government risks ‘zero-rights employment’, which occurs when a contractor works inside IR35, pays taxes similar to an employee but receives no employment rights in return. The Government did not address this in its response.
Having agreed with the Lords that there is a “need to give adequate scrutiny to the legislation at each state of the process”, the Government claimed it has made a “number of changes in response to stakeholder feedback”, citing the four consultations focused on IR35 that have been held since 2015.
Although, in answer to recommendations that an independent review of public sector IR35 reform should be undertaken, the Government said it has completed this and “independent researchers found that there was no significant disruption to the sector or its use of contingent labour as a result of the off-payroll reforms.”
Further research has been promised to explore the “long-term effects” of public sector changes, with the Government stating this will be available before private sector reform is enforced next year.
In the House of Lords report, the potential negative impact of reform on businesses, contractors and the labour market as a whole was explored. The Government batted away these concerns, referring to the research already carried out in the public sector, which “does not suggest that there is an overall reduction in the demand for the skills and services contractors offer as a result of these changes.”
The already announced independent research into private sector changes, which will be carried out six months after the reform has arrived was also referred to. This will, according to the Government, allow them to “continue monitoring the impact of reform over time.”
Concerns held about blanket IR35 determinations were also largely ignored. In response to points made by the Lords regarding non-compliant blanket assessments that result in contractors being forced inside IR35, the Government merely said it “recognises concerns” and that “HMRC will consider whether there is any additional support that can be offered to ensure organisations approach status assessments correctly.”
The House of Lords report rightly pointed out the HMRC’s IR35 tool, Check Employment Status for Tax (CEST) “falls well short of what is required.” But predictably, the Government disagreed with the Sub Committee who also said that CEST “is not fit for purpose.”
Defending its tool, the Government said numerous “enhancements” have been made and it has been “rigorously tested against employment status case law.” However, in reality CEST ignores one of the three key IR35 status tests, Mutuality of Obligation (MoO), has been dismissed in numerous IR35 court cases and asks a limited set of questions.
It is therefore Qdos’s view that it cannot and should not be relied upon to accurately determine IR35 status.
In response to the Lords raising concerns about the potential administrative costs of IR35 reform to businesses, the Government said it will explore these further, stating: “It is right to ensure the costs incurred in preparing for the reform are fully understood. HMRC have already begun reviewing the estimated administrative burden on businesses of implementing the reform, as committed to during the inquiry.”
This review will explore the average time and costs associated with preparing for and implementing the reforms, with the Government explaining that HMRC is “looking at how to reduce some of the burdens on businesses.”
As part of this review, the tax office will consult with the Administrative Burdens Advisory Board (ABAB) and publish the administrative burden costs at the next fiscal event.
The Government “shares” the concern held by the Lords about the potential growth in non-compliant umbrella companies as a result of reform and is “already working hard to “tackle this behaviour”. To do so, it has engaged with the Advertising Standards Authority, the Employment Agency Standards Inspectorate and other third parties.
The handful of alternatives to IR35 changes proposed in the Lords report, such as the creation of a “freelancer limited company” structure that qualifies for “special tax treatment”, were roundly rejected by the Government.
Despite having “considered fully” other avenues, the Government believes IR35 reform better addresses what it has previously described as the “unfairness of taxing two people differently for the same work.”
As frustrating as the Government’s overall response to the eye-opening House of Lords report, it is to a large degree expected. With no significant changes in store for the IR35 legislation or the incoming reform, our CEO, Seb Maley, advised private sector business on next steps:
“While this response is inadequate and frustrating, it doesn’t change the overall picture. IR35 reform is arriving in the private sector next April, which means businesses must prepare for the changes immediately. Despite being narrow-minded and short-sighted, the reform can in fact be managed with the right approach.”
The Government’s full response to the House of Lords IR35 report can be found here.
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