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Government must address IR35's inherent flaws and unfairnesses, says Lords Economic Affairs Finance Bill Sub-Committee

IR35 – the Government's framework to tackle tax avoidance by those in ‘disguised employment' – has not worked properly throughout its 20-year history. As a result of the Covid-19 pandemic the Government decided to defer by a year its plans to extend the off-payroll rules to the private sector. It should now use this extra time to completely rethink this legislation.

These are among the conclusions of the House of Lords Economic Affairs Finance Bill Sub-Committee's report, Off-payroll working: treating people fairly, published today.

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.

The Committee therefore calls on the Government to keep its promise on implementing the recommendations of the Taylor Review: 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.

During the passage of the Finance Bill the Government intends to legislate to carry out external research on the impact of the reforms six months after they come into effect. The Committee consider this is too soon to give a full and accurate picture and calls on the Government to carry out this research 18 months after the rules have been in operation.

Lord Forsyth of Drumlean, Chair of the House of Lords Economic Affairs Finance Bill Sub-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. 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.

“The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year? The Government needs to think this through very carefully. We call on the Government to announce in six months' time whether it will go ahead with reintroducing these proposals.

“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.”

The House of Lords Economic Affairs Committee appoints a Finance Bill Sub-Committee each year to inquire into the draft Finance Bill. This year the Sub-Committee decided its inquiry should examine the Government's proposal to extend the off-payroll working rules, which were introduced for the public sector in 2017, to large and medium-sized organisations in the private sector from April 2020.

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