Trying to find the most depressing part of the new House of Lords’ Economic Affairs Committee report on IR35 is not easy. There are so many possible candidates, for one thing, and as an insight into the legislative process it is little short of terrifying. Not even law by twitter like the Job Retention Scheme, but by the rank subordination to tax-raising of all other established principles of good regulation, such as that it be researched, fair, consulted upon and generally thought about to some extent before the off.
So this is the report of the Lords’ Finance Bill sub-committee into the extension of IR35 to the private sector. As we know, that was due at the start of this month but has been punted down the road for a further year because of the Covid-19 crisis. The first question might therefore reasonably be why this examination is happening now when, were it not for the virus, this iteration of IR35 would already be in force. Because unfortunately the most depressing part of this is not the criticism which the report levels at the government and HMRC in relation to IR35, much of which is very valid, but that the evidence on which the Committee reached its conclusions (basically, that IR35 is flawed and needs a fundamental re-think) was all completely obvious two years ago and more. The Committee refers slightly immodestly to “the problems we have uncovered”, but these are no more than what all stakeholders in the private sector PSC contracting field have been telling both the government and HMRC from the very start.
However, since shouting impotently at Finance Bill sub-committee reports is probably a sign that you have spent too long on lockdown, let us take a look at some of the detail. The report begins promisingly: “The IR35 rules…have never worked satisfactorily throughout the whole of their 20 year history”; “The government [has considered] this issue too narrowly, [only] in terms of its tax take. It 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…”; “It is likely that the off-payroll changes will cause widespread disruption”; “It would be completely wrong for the government to impose a new burden on businesses in the form of the existing off-payroll proposals”. So that is pages two and three out of 60. We haven’t even got to the Introduction yet, and the House of Lords’ boot is well and truly applied.
- The Committee supported IR35’s original policy objective of obtaining greater fairness in the tax system, but thinks that the current rules fail to reflect the growth in the independent contractor model at the bottom end of the gig economy, or the differences between that and those further up. “The lack of strategic co-ordination in this issue across government and between Departments is highly regrettable”.
- The government is accused of learning next to nothing (in those terms, essentially) from its experience of introducing IR35 to the public sector. The Committee records that there was significant disruption to public projects, contractors left key work undone, costs soared and specialist expertise became harder to recruit – all the same things the government was still being warned about in the run up to the private sector launch.
- IR35 also got a panning for its blurred edges such that individual contractors, end users and indeed HMRC itself could not always say with certainty when it was engaged and when not. The Revenue’s online CEST tool is condemned as not fit for purpose – it is noted that a recent update of CEST has magnificently increased by a full third the proportion of cases in which it is unable to provide a solution. Put against the number believed operating in the UK at present, that potentially represents over 45,000 PSCs with an “undetermined status” under CEST.
- The Committee also noted with disapproval the entirely predictable behavioural changes some private sector end users had already made to avoid becoming embroiled in dispute with HMRC – in particular, pushing all their PSCs inside IR35 or blanket refusals to deal with them at all, facilitated in each case by the reluctance of PSC contractors to get a “name” in their industry by challenging that position and so risk losing their incomes altogether.
- Because of the damage to the economy wrought by the coronavirus, businesses may still be too weak in April 2021 to face this “unnecessary burden“. A longer delay would allow proper analysis of how the introduction of these rules will affect the labour market and a chance “to tackle the ongoing deficiencies of CEST“.
- The Committee report rehearses a number of possible alternatives to IR35 which are simpler or fairer or both. To the wan smiles of end-users across the country, it then lists a number of other attributes which good tax rules should have and which IR35, in the Committee’s view, noticeably lacks. Such rules should be certain, supportive of growth, administratively straightforward and enforceable notwithstanding HMRC’s very limited resources. Ring any bells? Thought not.
It must now be seen as much less likely either that IR35 will still land on the private sector in 2021 (though this will probably be determined by the speed of the UK’s bounce-back from the virus crisis) or that it will do so in its current form. So overall a cracking piece of work in many respects even though it is two years late.