Decoding the Lords’ off-payroll working inquiry report: what contractors can take from it

Article written by Bauer & Cottrell’s Kate Cottrell for Contractor UK

Published this morning and authored by the House of Lords Economic Affairs Finance Bill Sub-Committee, this first-class report should be compulsory reading for all HMRC and HMT compliance and policy officers writes Kate Cottrell, co-founder of IR35 advisory Bauer & Cottrell.

The peers produced this report (‘Off-Payroll Working: Treating People Fairly’), in record-time, not missing a beat relating to the sorry tale of IR35 for over 20 years, including all the concerns raised yet ignored, time and time again.

An echo we all wanted to hear

In fact, the Lords have echoed all of the concerns raised by advisers, contractors, agencies, end-users and others in the flexible professional staffing space, over and over again.

Point 86 for example. There, it says the government is making commercial businesses responsible for enforcing a regime which even the tax authority has “struggled with”. So “effectively, the government is “privatising tax compliance”. We in the industry have said this all along, but now the Lords have said it too, officially putting it to the government so there can no longer be any doubt.

Point 97 for example. There, it says that despite being pointed out to them, “HMT/HMRC has not anticipated the behavioural consequences…[rather it tended to] dismiss them”. We in the industry have said these consequences, like blanketing, were happening all the time, but now the Lords have said similarly, officially putting it to the government so there can no longer be any doubt — or denials by HMT.

Point 113 for example. There, the Lords say that having asserted its officials foresee no impact on the labour market from the IR35 reforms, HMT “may be complacent”. This ‘no impact’ assessment was based on evidence that HMT submitted to the Lords in an oral evidence session on March 16. Many contractors probably came to the very same conclusion at the time of its airing and those who haven’t seen it, can make up their own minds as the stream is still available.

Point 129 for example. In line with what a contractor accountant pointed out after Budget 2020, the “government is replacing one unfairness with another” by creating ‘zero-rights employees.’

CEST, projections and yield — all now exposed as flimsy

At more than one of the report’s points, and vindicating the many who have said the same, the Lords also criticised HMRC’s CEST tool. And they suggest they have about the same lack of confidence in HMT/HMRC’s estimate of £1.3million projected tax leakage. Similarly, the peers highlighted the very poor timescales for the provision by HMRC of its off-payroll guidance (point 137), saying the guidance was too late, given that there was just 6 weeks to go before the expected commencement date of April 6th 2020.

Further criticism is made by the Lords committee of the research commissioned by the government following the public sector IR35 reform implementation (point 143), where this time, just 6 months after the reform was introduced, HMRC/HMT claimed all was well. Many in this industry will remember that every time anyone advised officials differently, with evidence in support, it was dismissed as “anecdotal”.

Just what is it at HMRC/HMT with six months before/after?

Well, the Lords make a parallel criticism of the government’s latest intention to review the implementation of the private sector IR35 rules after only 6 months of them being operational.

These individual points might all seem specific. Some might not relate to you directly. But contractors and many others in the contractor industry should now be thinking of celebrating, because the Lords have not only listened; above all else they’ve understood . And they’ve understood not a just a bit; but actually practically everything we, as a sector, have been conveying since 2000 (IR35 introduced), 2017 (IR35 reform introduced in the public sector) and during 2019/20 — in the run-up to the April 2020 intended launch.

Putting Taylor’s shelving perfectly

Yet another very clear recommendation that we advisers have all been seeking for some years is the implementation of the Taylor Review — a joined-up approach to employment and tax status. The Lords now rightly challenge government to “keep their promise”. We all called for this joined-up approach prior to the public sector IR35 reform in 2017, but the government said ‘no,’ because of the “immediate risk to the exchequer.” But they have done almost nothing in response in practice or in legislative terms, despite saying they accept virtually all of Matthew Taylor’s recommendations. The peers put it perfectly:

“It [government] should also, after two years of promising to do so, finally implement the recommendations of the Taylor Review of modern working practices: that the taxation of labour should be made more consistent across different forms of employment, while at the same time improving the rights and entitlements of self-employed people.”

The inquiry report’s concerning areas

So are there any concerns in the Lords inquiry’s report? Yes, unfortunately there are. Note, chapter 6 and the Lords’ recommendation for a “stop-gap solution” (short- term measure) to meet the policy objectives of improving compliance, protecting the tax base and promoting fairness and a long-term alternative that is not burdensome for businesses.

The problem is it will take a long time for a short-term means to be designed, consulted upon and implemented and having two potential systems on the horizon will be a nightmare to administer for all parties. We have seen this already in the private sector when trying to deal with the ‘old’ IR35 rules (since 2000), and the proposed new ones (April 2020).

Now of course, with the coronavirus-inspired IR35 delay, no one quite knows what form IR35/off-payroll working legislation will take. This uncertainty looks set to creep into the plans of contractors’ clients between now and October.

What the government might counter with

My concern is that the government may respond by accepting the Lords’ recommendations, but simply say something like:

“We have already drafted the private sector IR35 rules; produced lots of guidance, educated and supported lots of medium and large employers, many of whom are prepared; and it’s only ‘fair’ to the public sector if we just implement these reforms as they are. While, yes Lords, working on the long-term solution.”

A further argument in favour of going ahead is that HMRC/HMT are working in other areas due to COVID-19.There’s no doubt that taxes and NIC will have to go up significantly for everyone, so just letting this go ahead, irrespective of the current lack of financial support for outside IR35 contractors, would be extremely concerning — but unsurprising to me.

All eyes on October 2020

Hopefully we will all know by October 2020 (as recommended by the Lords) what the future holds for the new IR35 rules. In the meantime, no contractor or business affected by the off-payroll working framework should be complacent and can only currently work on the basis that they it is still on the table to come into force from April 6th 2021.