IR35 legislation is 'inherently flawed and unfair' finds sub-committee

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With the additional tax on dividends and the undoubted additional tax the chancellor will impose in the future on contractors plus VAT paid by a large majority of Ltd company consultants there is ...


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The Government’s framework to tackle tax avoidance by those in ‘off-payroll’ working has not worked properly in its 20-year history.

That’s the conclusion of a new House of Lords Economic Affairs Finance Bill Sub-Committee report, Off-payroll working: treating people fairly, which found the IR35 legislation had ‘inherent flaws and unfairness’.

Plans to overhaul the legislation were put on hold last month as a result of the coronavirus pandemic. The Committee now argue government should use this extra time to rethink the legislation.

The reforms were set to extend the off-payroll rules to the private sector and were due to come into force this month. They have now been delayed until 6 April 2021.

The report argued the Government had not properly analysed the unintended behavioural consequences of the proposed reforms, for example contracts already being laid off despite the reforms’ delay.

Many witnesses told the Committee that the rules had made them ‘zero-rights employees’ meaning they had no rights as an employee or tax advantages of being self-employed.

It therefore asked Government to carry out research into the impact of the reforms for 18 months after they come into effect rather than the six months it intends to.

It also called on the Government to keep its promise on introducing the Taylor Review recommendation that the taxation of labour should be made more consistent across different forms of employment and that there should be a fair balance between tax, rights and risk.

Lord Forsyth of Drumlean, chair of the Committee, said: “The Committee welcomed the Government's decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic.

"However, our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. We call on the Government to announce in six months’ time whether it will go ahead with reintroducing these proposals.”

Last week, the Committee sent a letter to the Treasury querying whether businesses will have recovered enough from the coronavirus pandemic by next April to meet the costs of implementing and running the new off-payroll reforms.

It also expressed concerns that the reforms may lose both contractors and businesses money.

The changes could prompt contractors to leave freelancing meaning they lose business and face a pay decline or mean the private sector uses contractors less.

Perhaps most crucially, the letter highlighted concerns that the proposed IR35 reforms will create unfairness because they identify individuals as employed for tax purposes, without providing the benefits and protections that come with employment.

Lord Forsyth of Drumlean, chair of the Committee, said: “The Committee welcomed the Government's decision to defer these off-payroll working rules in the wake of the Covid-19 pandemic.

"However, our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. We call on the Government to announce in six months’ time whether it will go ahead with reintroducing these proposals.”

Responding to the sub-committee’s letter, Nicole Forbes, deputy general counsel at Globalization Partners, said: “Governments around the world are grappling with the issue of how best to provide social safety nets to contractors, the self-employed, and gig-economy workers while also wanting to support innovation and flexibility in the workforce.

“The potential IR35 reforms risk government giving with one hand, yet taking away with the other, and that’s why it’s right and fair that the changes to these regulations are further explored, and questioned where necessary.”

Comments

With the additional tax on dividends and the undoubted additional tax the chancellor will impose in the future on contractors plus VAT paid by a large majority of Ltd company consultants there is little difference between the tax paid by PAYE employee’s and self employed contractors. I have often felt that the government ( whoever in power) and councils like to treat all Ltd companies as large corporations regarding tax, and other financial matters ( or actually not, we small businesses probably pay more tax v turnover) . Please just give us a bit of a break


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