On February 4th it was announced that a House of Lords sub-committee will conduct an inquiry into the extension of the off-payroll rules to the private sector. The sub-committee is part of a wider inquiry into the Finance Bill as it passes through Lords, which will review all proposed and existing tax legislation.
Published last July, the Finance Bill 2019-20 announced 17 key tax changes, including the extension of the off-payroll working rules to the private sector. The Treasury anticipates that the reforms, which will see medium and large businesses take on responsibility for making IR35 determinations, will raise £1.1bn in the first year.
The committee’s inquiry will consider how the rules have affected the public sector and whether HMRC has conducted sufficient assessment of the impact on private sector companies. It will also look at whether the tests for determining employment under the rules are sufficiently clear and the awareness of parties in the supply chain.
While the inquiry has been welcomed by industry spokespeople, there’s concern that it might have come too late in the day. The sub-committee wants to know about the real-life experiences of individuals and organisations, as well as responses relating to the broader impact on the labour market. However, stakeholders are saying that there’s insufficient time to conduct a genuine inquiry before the planned April rollout.
With the final legislation scheduled for the March Budget, the Treasury has continued to make it clear that the reforms will go ahead, despite the current IR35 Review. Just this last week, HMRC accidentally published guidance on the new legislation, only to quickly remove it from their website. Pre-emptive acts such as this, and the recent publication of secondary legislation before the review’s completion, indicate that the Treasury has already set the reform machinery in motion.
Businesses and contractors have fiercely opposed the reforms, arguing they will increase a business’ contractor costs by up to 14 per cent, while costing the typical limited company contractor thousands of pounds in additional income tax and NICs. This has perhaps prompted the inquiry to also consider if it’s fair that some individuals are taxed as if they are employees, but do not have the rights of employees.
The government has previously declined to address the matter of workers’ rights in relation to IR35, stating that the two issues are separate. However, a recent industry report found that 50 per cent of contractors would ask for employment benefits and an increase in their rates if made to work inside IR35.
In 2013 off-payroll working and personal service companies (PSCs) were put under the spotlight by a House of Lords committee, which discovered just how unsuccessful the strengthened IR35 enforcement had been in generating revenue for the Exchequer. Despite this, nobody could think of a simpler and more effective alternative to the IR35 framework. Subsequently, the rules are arguably no longer fit for purpose, yet the government are still attempting to make them ‘fit’.
A small but perhaps significant concession was made on the 7th of February when the HMRC announced that it was changing the off-payroll rules to help businesses prepare in the private sector, stating: “The rules will now apply only to payments made for services provided on or after 6 April 2020. Previously, the rules would have applied to any payments made on or after 6 April 2020, regardless of when the services were carried out.”
This means that businesses will only need to determine whether the rules apply for contracts they plan to continue beyond 6 April 2020, lifting some of the administrative burden. Although any concession is likely to be welcomed by businesses at this stage, it’s again confusing that the announcement pre-empts the conclusion of the IR35 review, which should properly take a holistic view of the evidence before making any changes.
In line with the review’s limited agenda, the concession is more concerned with the smooth implementation of the April reforms, and not with feasibility or impact. This will perhaps fall to the Lords inquiry to grapple with in what could be a protracted and disruptive process of on-going change. Even if the April reforms go ahead, the wider economic impact, especially in light of Brexit, will inevitably force the government to consider the impact of its actions. Until then, contractors are being advised to continue with their preparations.
The deadline for submission of written evidence to the Lords inquiry is 25 February 2020.
This content has been supplied by IR35 Guru.
If you’ve been affected by the Off-Payroll reforms, or if you’re unsure about your employment status, Umbrella Exchange has a range of options to help you keep your contracting career on track. To talk to a member of our team, call: 0203 393 3881