Lords: New IR35 off-payroll tax rules 'riddled with problems, unfairnesses, unintended consequences'
- Reference: 1587991453
- News link: https://www.theregister.co.uk/2020/04/27/lords_ir35_report/
- Source link:
The government had intended to push ahead with reforms to IR35, which would make large and medium-sized businesses responsible for determining the tax status of a contractor who works via a Personal Services Company.
The new rules require assessing whether the contractors meet Her Majesty's Revenue and Customs's (HMRC) definition of self-employment - criticised by many techie contractors as being variable and difficult to comply with. Previously, contractors were responsible for this.
Many witnesses told the Committee that the rules have made them 'zero-rights employees' with none of the rights of being an employee, or the tax advantages of being self-employed
The new rules were set to come into force at the beginning of the UK tax year, from 6 April 2020. However, the disruption caused by the COVID-19 outbreak caused the government to [1]delay their introduction .
The respite gives the government the opportunity to completely rethink the legislation, the Lords say.
It is "completely wrong for the government to impose a new burden on business in the form of the existing off-payroll proposals," the report, [2]"Off-payroll working: treating people fairly" [PDF] , from the Lords' Economic Affairs Committee, Finance Bill Sub-Committee.
"The government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms. Contractors are already being laid off, despite the reforms' delay. Many witnesses told the Committee that the rules have made them 'zero-rights employees' with none of the rights of being an employee, or the tax advantages of being self-employed," it says.
Companies making 'blanket' rulings
The IR35 reforms appear to have warded private companies off hiring independent contractors that are employed via Personal Service Companies. [3]For example, Barclays, Lloyds, HSBC, Deutsche Bank and RBS have all said that they will no longer hire contractors that work via PSCs out of fear that their firms will fall foul of the complex assessments that determine if a contractor is in scope of IR35 and be financially liable.
Other companies are pushing their freelance workforce into umbrella companies and PAYE situations, with what the contractors have claimed is [4]an effective pay cut of up to 30 per cent . The Register recently reported that [5]BAE Systems had applied blanket determinations that put all their contractors inside IR35.
Lord Forsyth of Drumlean, chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said: "Our inquiry found these rules to be riddled with problems, unfairnesses, and unintended consequences. The potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the government. It must devote time to analysing all of this. A wholesale reform of IR35 is required."
He called on clarity from the government, saying it should announce in six months' time whether it will go ahead with reintroducing these proposals in 2021.
Tory chancellor pledges to review IR35 rollout in UK private sector – just like all the other parties [6]READ MORE
"Contractors already concerned by these uncertain times now have the added worries of paying more employment taxes and having their fees cut by clients making additional National Insurance Contributions. Also concerning is the number of companies getting rid of contractors in anticipation of the implementation of these new rules," he said.
CEST la vie...
The Lords also looked at the [7]controversial Check Employment Status For Tax (CEST) tool , which the Treasury urges public sector bodies to use to determine whether their contractors fall inside or outside IR35. The tool has been criticised for giving different results at different times and being susceptible to being gamed by companies looking to push their contractors inside IR35.
The peers noted in the report that "up to 35,000 PSCs will be likely to have an 'undetermined status' under CEST" and that the committee had received criticism from many bodies, including NHS Digital, about their "experience of CEST".
What is IR35?
IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Those workers found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect, despite not receiving benefits enjoyed by full-time employees, such as holiday or sick pay, pension, or parental leave.
The reforms are part of the government's crackdown on so-called "disguised employment", where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
Critics say that being inside IR35 is essentially "no-rights employment," meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason.
The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line. The implementation in that area has been [8]described as an "utter shambles."
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE) said: "The report by the House of Lords Committee is a much-needed dose of sense in the IR35 fiasco... "
"The contractor sector is already under immense strain because of the coronavirus crisis and the pointed lack of government support for the majority of contractors who work through limited companies."
Dave Chaplin, CEO of ContractorCalculator, said: "The legislation is obviously contentious amongst MPs given that it was pulled out of the order of today's reading of the Finance Bill. UK industry is currently on its knees due to the COVID-19 crisis so it would be irresponsible for the government to consider putting the deeply flawed legislation into this Finance Bill. The UK economy will need the help of the UK’s flexible workforce to get back on its feet as we emerge from this crisis and that is going to take some time. Now is not the time to apply a straight-jacket."
The review of IR35 was [9]first proposed in the run-up to the last general election by then would-be chancellor Sajid Javid , who went on to briefly serve as Chancellor of the Exchequer. But when the Treasury made an official announcement in February, it said the rules would be reformed, rather than reviewed.
Following Javid's resignation, new Chancellor Rishi Sunak, [10]promised in February that HMRC would not be "heavy-handed" in pushing its IR35 tax reforms.
Sunak then [11]delayed the new rules from 6 April 2020 to 6 April 2021 in response to the ongoing spread of the 2019 novel coronavirus in order to help businesses and individuals.
However, chief secretary to the Treasury Steve Barclay later told Parliament the decision was "a deferral, not a cancellation" and that the government "remains committed to reintroducing this policy." ®
Sponsored: [12]How to Build Your Digital Experience Portfolio
[1] https://www.theregister.co.uk/2020/03/17/uk_ir35_tax_reform_postponed/
[2] https://publications.parliament.uk/pa/ld5801/ldselect/ldeconaf/50/50.pdf
[3] https://www.theregister.co.uk/2020/02/27/ir35_to_go_ahead_says_government_review/
[4] https://www.theregister.co.uk/2020/02/27/ir35_to_go_ahead_says_government_review/
[5] https://www.theregister.co.uk/2020/02/24/bae_puts_all_contractors_inside_ir35/
[6] https://www.theregister.co.uk/2019/12/02/chancellor_pledges_to_review_ir35_changes/
[7] https://www.theregister.co.uk/2019/11/25/updated_ir35_calculator/
[8] https://www.theregister.co.uk/2017/01/25/gov_advising_it_contractors_to_hike_fees_by_20_per_cent_to_avoid_ir35_exodus/
[9] https://www.theregister.co.uk/2019/12/02/chancellor_pledges_to_review_ir35_changes/
[10] https://www.theregister.co.uk/2020/02/24/treasury_to_go_easy_on_ir35_contractors/
[11] https://www.theregister.co.uk/2020/03/17/uk_ir35_tax_reform_postponed/
[12] https://go.theregister.co.uk/tl/1936/-8578/how-to-build-your-digital-experience-portfolio?td=wptl1936
"#5 The measures impose no new tax, they merely seek to prevent avoidance of an existing one."
Not entirely true. Pension contributions for an employee are made before tax is deducted, working inside IR35 they are deducted after the tax, so yes, a new tax on pension contributions has been introduced. Legitimate Expenses are similarly impacted, for an employee they are deducted before Corporation Tax, under IR35 expenses are covered after the tax has been deducted.
Jolyon Maugham has fallen into the trap that every person performing a role is on an equal footing when the reality is they are not. Employees and Contractors are engaged on different terms, and receive remuneration on different scales.
Employees have protections contractors do not, and employees receive a range of benefits that a contractor must account for out of the gross payment they receive (holidays, sick pay, etc is all part of the gross payment, contractors still receive them, just not from the client as part of the package).
IR35 specifically targets the little man, forces them out of the market and paves the way for the large consultancy companies. Take the money away from the people and put it back in the pockets of the rich.
unintended consequences
I'm far from being an expert in HRMC's stuff not even being a UK citizen, but the consequences have been announced a LONG time ago, on those pages and others ...
How can it be unintended ?
Re: unintended consequences
" the consequences have been announced a LONG time ago, on those pages and others
How can it be unintended ?"
Because most civil servants are ignorant as shit and assume our outcries are just swinging the lead* - as they would naturally do in our position.
* How language changes. I feel the need to explain that the origin of the phrase is a nautical one meaning to sound out the depth of water with a lump of lead on the end of a rope, to see if one can gain passage and not run aground. Outside of its original context, it has connotations of trying to get away with a con.
Re: unintended consequences
Actually the lead on a rope was dropped to the floor and then the sailor holding it would hold it vertically and walk along the ship. The time was taken at two points and so the speed of the ship calculated. Swinging the lead was a shortcut so the sailor didn't have to walk to the start point. This was bad as it is less accurate leading to navigation errors (potentially fatal if it means arriving at the end of the sea too soon)
Re: unintended consequences
Google agrees with you but I was told a different story about the origins - that it was to do with builders using plumb lines to find a vertical, you can't find the vertical until the lead weight stops moving so if you keep gently swinging the lead you can drag out a really easy job for a long time
"the Treasury made an official announcement in February, it said the rules would be reformed, rather than reviewed."
IR35 needs scrapped completely and the entire Income Tax system overhauled, it is no longer fit for purpose.
National Insurance is an anachronism that should have long since been buried as it no longer "pays for pensions and the NHS" - all tax from all sources covers all government spend so stop pretending to people that certain taxes are of more value than others.
A simple set of bands of income tax for all income is a much fairer system, less loopholes that need stupid subjective assessment such as IR35. And that is IR35s major problem - it is a subjective view of an engagement, an opinion formed by HMRC based on how some wooly questions are answered and how the assessor feels on the day (have they made their quota this month?). Simple banding is objective - "Did you have £xxxxx income last year, then you are due xx% in tax"
"Did you have £xxxxx income last year, then you are due xx% in tax"
Define income in a way that can be applied to everyone in a fair manner... which is the root of the problem.
IR35 was put in place because contractors were exploiting a (rather big) loophole by declaring no income yet taking home a huge pay packet each month whilst working in a single place, often for years, abiding by their 'not really' employer's rules and regulations.
Ever since then there has been a game in play where contractors and their agencies have come up with new and interesting ways of not declaring income as income and HMRC have played whack-a-mole. This is the latest round in the game.
The income is all defined, declared, and taxed already. Contractors are paying tax on the dividends from their PSCs. But at a different rate to that charged on salaries. If you just equalised those rates, then it would no longer matter to HMRC whether you chose to take the money out of your PSC as salary or dividend.
"by declaring no income yet taking home a huge pay packet each month"
All income must be declared on the SA100 Self Assessment or they are conducting tax evasion and should go to jail. Pretty sure you'll find the vast majority declaring their "huge pay packet" on their SA100.
Whether it is tax paid on dividend or employee commission it doesn't matter as it all lands into the same pot. Contractors have slight tax advantage because they don't receive benefits and protections as employees.
There is nothing wrong in servicing one client for years if you are self employed working on your own account. Do you want to deprive businesses off specialists just because they used them more than say one year? Do you want people to be forced into employment and be someone's servant?
It has nothing to do with tax and since 2017 changes to dividends I don't think people even consider this when choosing self employment.
Dividends
It seems like this whole question would go away if all income were taxed according to the same rules, regardless of source. Is there a good reason why dividends are taxed differently to employment income?
Re: Dividends
Dividends were originally taxed differently because they came from income which had already been taxed - i.e. the company profits after corporation tax had been paid on them. The dividend tax rate plus the corporation tax rate were broadly equivalent to the tax which would have been paid had the money been taken out of the company as salaries . Dividend tax was changed a few years ago, I think because company tax had dropped much lower than historic values without the dividend tax being raised to compensate.
I agree with other posters here that NI should be abolished as a separate tax and rolled into income tax and corporation tax and all (personal?*) income taxed at the same rates, whether salary, pension or dividends. Pensioners would complain, cos they don't pay NI, but I hazard a guess that the system would probably pull in more tax so overall rates might go down a bit.
*I am not an economist, so I don't know what the impact of doing this might be on things like pensions - witness Gordon Brown's alleged knackering of UK private pensions by fiddling with dividend taxes.
Re: Dividends
Interesting point about double taxation. Though double taxation is seen as acceptable in other areas, e.g. VAT on duty.
Re: Dividends
but I hazard a guess that the system would probably pull in more tax so overall rates might go down a bit.
Even if the system wouldn't pull in more tax, it would be a lot simpler so needing much less tax collectors, resulting in a very nice reduction in costs. And that in its turn tells you why HMRC is making such a mess of the necessary tax reforms.
Re: Dividends
That is definitely one of the reasons. Imagine tax inspector assessing company accounts through automated tool in minutes versus deliberating with multiple colleagues, accountants and organisation for months on cushy CS salary. If that is not corrupt behaviour then what it is? We need a deep reform of this institution.
Re: Dividends
In theory Dividends can only be paid out of profits, and profits have already been assessed for Corporation tax, so the status was that (some) tax had already been paid.
Up until the recent dividend tax introduction every person in the UK was entitled to an exemption against any personal income tax equivalent to the corporation tax already paid. This meant that there no additional tax to pay until your total income exceeded the higher rate band. i.e. HMRC received the same amount of tax, it just came from two different tax sources (assuming both Company and person are tax resident in the UK).
It could be argued that dividend income should be taxed fully again, however there is evidence that simply leads to businesses finding alternative methods of dispersing profits (e.g. share buybacks to raise the value of the individual share price, or alternative investment).
"Critics say that being inside IR35 is essentially "no-rights employment," meaning techies are paid and taxed similarly to regular employees but do not receive any of the security or protections that go along with permanent employment. Contractors within IR35 can be hired and fired at will and without reason."
All these so called employee rights are puitting an unbearable strain on the employers, who would be much more efficient if they didn't have to trouble themselves providing them....
/s in case anyone really needed it.
>Contractors within IR35 can be hired and fired at will and without reason.
Sorry, but this is a really bad misconception to be under. The overwhelming majority of people currently feeling the pain of the eternal saga of bad IR35 regulations are freelance contractors, but they are not employed by the organisation they are working for. They are typically employed by or at least a director of a company that they additionally wholly own. There are good reasons for this (liability limitation, legal/financial simplicity) and bad reasons (paying less employers' NI), but the reality is that contractors are typically full time employees of their own firm.
If they choose to not furnish their employees (i.e. themselves) with paid sick leave or paid holidays or training opportunities, then they should probably take that up with their actual employer (i.e. themselves). If their employer has negotiated a contract with absolutely no termination protections then they should have a word with the person that negotiated that contract (i.e. again, themselves).
IR35 campaigners need to be careful here. On the one hand they want everyone to know they are definitely not employees per se and are definitely not doing this just to reduce their tax burden. On the other hand they want the powers that be to think of freelancers as "zero rights employees". We can't have it both ways. We should be making it entirely clear that we aren't zero rights employees, because if we were we'd just be on zero hours, rolling 364 day employment terms like every cleaner in the land. We're high value contractors delivering high value services and we shouldn't pretend there is any commonality with employment, because there should not be.
"On the one hand they want everyone to know they are definitely not employees per se and are definitely not doing this just to reduce their tax burden. On the other hand they want the powers that be to think of freelancers as "zero rights employees". We can't have it both ways."
I think you misunderstand. Contractors are not calling themselves "zero rights employees". They are saying that, if declared inside IR35, they are effectively being treated as "zero rights employees".
But therein lies the rub. It implies that IR35 has any relation to their employment rights. Nothing about the character or legal basis of the commercial and contractual relationships depends on IR35. It is a regulation that determines how much tax you pay, and by what legal mechanism. A vague and easily broken one, but a taxation regulation nonetheless. If they're declaring that contractors inside IR35 are employees without rights, then so are contractors outside IR35.
Further, if we want to get into the more abstract side of things, it seems to imply that we have the right to trade off our employment rights for more money - i.e. that if we're "outside" it's OK that we don't get holidays or sick leave. Such a right does not exist. If the lobbyists carry on down this route then HMRC will just change tack and start bringing actions against these employers (i.e. the contractors) for not complying with employment law.
Trust me lads, you'd much rather pay a mite more NI.
You can't run a business on inside IR35 contract, because you get entire fee as a salary and your company gets nothing (5% in private sector). How do you pay company bills? Your company asks you for a loan?
How to make it go away
Tell parliament that the rule will apply to MPs and ministers acting as consultants.
Finally, an ounce of sense
" The UK economy will need the help of the UK’s flexible workforce to get back on its feet as we emerge from this crisis and that is going to take some time. Now is not the time to apply a straight-jacket "
Nice to see that somebody has a clue.
The only question left is : is it not too late ?
The solution to IR35 is extremely simple and could be done today.
Government is okay that deemed employee is hired by an umbrella and receives small basic salary + bonus. Government however is not happy that a director pays him or herself small salary + dividend.
The difference between the two scenarios is that the end tax level is very similar, but deemed employee pays NI on the bonus.
Just make NI payable on dividends and make them deductible from Corporation Tax.
Problem solved.
This is not going to happen, however, because large consultancies have their greasy hands in many pockets.
Self-employed person being wrongly assessed as inside cannot claim business expenses (they can 5% in the private sector). This means if they need to buy tools to do their job, they need to pay them off their salary, however an employees employer can buy the same tools and deduct them from the tax.
https://twitter.com/JolyonMaugham/status/1254648730877341696
Counter-points to those made in this report.
And replies have counter-points to the counter-points.