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Another report has exposed the true impact of IR35 reform and criticised the government’s handling of it.
This time, it is the ‘Off-payroll working follow-up inquiry’, carried out by the Finance Bill Sub-Committee, which examines the effect the reform in the private sector has had on businesses, contractors and the wider labour market.
Similar to the National Audit Office’s (NAO) investigation into the public sector changes earlier this month, this review is highly critical of HMRC’s IR35 tool (CEST) raises concerns about zero rights employment and highlights the damage the changes have had on contractors and businesses. You can read more about the NAO investigation in our article HMRC claims impact of IR35 reform in public sector was ‘minimal’.
Many of the original worries regarding HMRC’s check employment status for tax tool, the report states, were repeated by contractors, engagers and industry experts who cited that it was still “not fit for purpose”. This is despite the tool having been in operation for nearly five years.
The continued absence of questions surrounding Mutuality of Obligation (MOO) are a key area of concern. According to the report, Stephen Ratcliffe, of the Employment Lawyers Association (ELA), highlighted in his evidence that MOO is “the ‘first irreducible minimum’ condition (of three) for there to be an employment relationship”.
He also pointed out that CEST is not a “codification of the law on employment status” and should not be used as such by HMRC or engagers. The sub-committee agreed with the statement, adding that “HMRC needs to ensure that [...] it recognises the use of other means to assess employment status is both legitimate and reasonable”.
HMRC had told the sub-committee in its submission that “in order for it to be easy to use, not be expensive and take up too much of people’s time [CEST] will deal with 80 per cent and not 100 per cent of cases” and that to produce an outcome on all cases would be complicated.
In its recommendation, the sub-committee criticised the 20% indeterminate rate – which has left well over 200,000 contractors and businesses in limbo – saying it is a “significant number of people” that still need support in determining IR35 status. It added that “more must be done to improve” this.
The report also draws attention to the first inquiry carried out by the sub-committee of the “unwelcomed developments” triggered by IR35 reform. These were blanket contractor bans and non-compliant blanket IR35 assessments made by businesses.
Further evidence submitted suggested that this trend had continued, with many companies choosing to take this “risk averse approach”. The committee said such a move is “regrettable” as they are “driven by tax, rather than commercial considerations.”
It recommended that a “tougher compliance action is needed” to ensure that engagers do not evade their obligations to make individual assessments.
While blanket assessments continue to plague contractors, recent Qdos research suggests that the dust is settling somewhat on the changes. For example, the number of outside IR35 contracts surged by 83% between April to November 2021.
In addition to this, the sub-committee also pointed out that the cost of reform on businesses and their ability to effectively and efficiently make status determinations has substantially increased. It made clear that “HMRC has failed to appreciate the burden of the costs”.
The issue of ‘zero rights employment’ was also explored in detail in the report. As the number of contractors operating inside IR35 grows, there are more contractors being taxed as employees but without receiving employment rights in exchange. The government was urged to address the issue of zero rights employment if it is “truly committed to fairness in the workplace.”
The “damaging” impact that the reform has had on the labour market did not go unnoticed by the sub-committee either.
The report cited research by IPSE which showed that 1 in 3 contractors had left self-employment, either moving into a permanent employee position or retiring – this chimed with studies conducted by other organisations including the CBI and the FCSA. As a result, the sub-committee slammed the government for not “confronting the challenges” posed by IR35 reform on businesses and workers.
It wrote in its letter to the financial secretary: “As we recommended in our 2020 report, research into the impact of measures must take into account the wider impact of the changes on the UK’s labour market and the broader economy.”
Finally, the report also highlighted the sheer volume of contractors being forced into working via an umbrella company – a fivefold increase in the last 15 years. The biggest concern here, industry experts pointed out to the committee, was the “worrying trend” of rogue umbrella companies associated with tax avoidance.
Taking this into account, the sub-committee said it is particularly concerned about those on lower incomes who are more at risk of becoming involved with non-compliant umbrella companies. They welcomed the government’s call for evidence into this, stating:
“In the absence of effective statutory action, umbrella companies are proliferating. More and more individuals are at risk of getting caught up in tax avoidance schemes. The Government needs to commit to a date for bringing forward legislation to create the proposed single enforcement body to regulate umbrella companies.”
To conclude, the Finance Bill Sub-Committee’s echoes much of what the NAO’s investigation found into the impact on the public sector and in its final statement, urged the government to implement the proposals set out in the Taylor Review, which calls for a fair and decent labour market.
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