IR35 rules found to be riddled with flaws and unfairnesses


Witnesses told the Finance Bill sub-committee that IR35 rules had left them in a ‘halfway house’: they do not enjoy the rights that come with employment, yet they are considered employees for tax purposes.

“IR35 was conceived 20 years ago. It was a sickly child when it was conceived, and I do not think it has got any better along the way.”

These were the words of Justine Riccomini from the Institute of Chartered Accountants of Scotland (ICAS), to the Finance Bill Sub Committee. She summed up the range of evidence we received from over 700 contractors, businesses and tax specialists during the course of our inquiry.

It’s right that everyone should pay their fair share of tax. But as we set out in our report , Off-payroll working: treating people fairly, the IR35 rules—the Government’s framework to tackle tax avoidance by those in ‘disguised employment’—have never worked satisfactorily, throughout the whole of their 20-year history.

Ignoring IR35’s troubled past, the Government had planned to extend the off-payroll working rules to the private sector in April 2020. These rules build on IR35, and the proposals were designed to mirror similar rules implemented in the public sector in 2017. As the Committee heard from numerous witnesses, this is despite parts of the public sector reacting in 2017 by making 'blanket assessments' that groups of contractors were within the rules –in order to avoid challenges from HMRC.

The Covid-19 crisis, and the Government’s sensible judgement that introducing these rules would be dangerous at such a difficult time for the economy, mean that the implementation of the rules will be deferred for a year. But kicking these problems down the road will not make them go away.

The Committee of course welcomed the Government’s decision to defer: the reforms were always likely to make the labour market sick. But the Government now needs to think again about the whole IR35 framework if it believes businesses recovering from the worst crisis since the Second World War will be prepared to take on this burden in just 12 months’ time.

Our inquiry found the rules to be riddled with flaws and unfairnesses. The Government has overlooked the potential impact on the wider labour market, and particularly the gig economy. The Committee also heard that many companies were already making blanket status determinations and laying off contractors in anticipation of the implementation of these new rules, despite their delay.

Witnesses also told the Committee that the rules had left them in a ‘halfway house’: they do not enjoy the rights that come with employment, yet they are considered employees for tax purposes. In short, they are “zero-rights employees”. This flies in the face of the recommendations in the Government-commissioned Taylor Review: that taxation of labour should be made more consistent across different forms of employment, while at the same time the rights and entitlements of self-employed people should be improved.

I hope the Government takes the opportunity afforded by this unexpected delay to fundamentally reconsider its proposals. It should ensure that there’s a fair balance between tax, rights and risk. Contractors already concerned by the economic uncertainty of coronavirus now have the added worry of paying more in employment taxes and having their fees cut by clients – despite no increase in their rights or entitlements. The Committee urges the Government to go back to the drawing board and consider the fairer alternatives that we lay out in our report.

Lord Forsyth is a Conservative peer and chair of the Lords finance bill sub-committee.

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