The announcement last month that the changes to IR35 legislation have been deferred to April 2021 was welcome and necessary. A month on, it is very clear that the coronavirus pandemic will continue to have a long lasting impact on employers in all sectors of the economy so it is timely that the House of Lords Select Committee on Economic Affairs has this week released a report which is very critical of the existing IR35 system and the narrowness of the reasoning behind the reforms.
The central thrust of the report is that the off-payroll working rules do not treat people fairly because they create a situation where individuals offering services via personal service companies are likely to become “zero-rights employees“, meaning that they are taxed as employees but are not treated as having statutory employment rights.
This criticism is valid and will not be news to HR practitioners. Since the IR35 changes were introduced in the public sector in 2017, we have been advising on the need to consider whether contractors who are deemed to be employed for tax purposes should also be onboarded as employees. This might be because the individual views this as a fair quid pro quo for being taxed as an employee, or because the assessment of the services delivered by the individual has made the client understand that it needs to retain their services. Of course, it must be taken into account that people who have been successfully on-boarded in this way are unlikely to provide negative feedback to a Parliamentary committee.
Nevertheless, we now face the prospect of a deep and prolonged business downturn with large-scale redundancies. For the economy and for individuals, recovery is going to be increasingly reliant on agile micro-businesses and consultants.
As the report puts it, the off payroll rules have been devised with an overly narrow focus on the tax take and without giving proper weight to the wider shifts in the operation of the UK labour market, particularly sectors of the economy where short-term project work is the norm. The impact of coronavirus is only going to exacerbate these trends.
It recommends that the government announces by October 2020 whether it will introduce the IR35 changes as planned in 2021. In the longer term, it urges the government to reassess the entire IR35 work and to consider a new system based on the government’s own December 2018 Good Work Plan.
Overall, it advocates replacing IR35 with a system which:
- is more straightforward to understand, implement and enforce;
- preserves the flexibility that exists within the UK labour market;
- ensures that treatment as an employee for tax purposes should only apply where there are employment rights and risk-sharing between employer and contractor; and
- does not place unnecessary administrative burden on end-user clients.
For advice on employment and self-employment issues, please contact our employment team.