MPs passed a resolution on Tuesday (19) allowing Finance Bill 2020 to be amended to introduce changes requiring large and medium private sector entities to assess the IR35 employment status of contractors and, where the rules apply, deduct income tax at source.
All tax measures and other charges (new taxes/charges and increases to existing ones) require a ‘ways and means resolution’ to authorise them before they can be legislated for. All of the measures in the current Finance Bill have been authorised through such resolutions already. This resolution was presented separately because this measure is being introduced as a committee stage amendment to the bill.
The changes to off-payroll working rules (which have applied to public sector organisations since 2017) were in the draft Finance Bill and were originally going to come into effect on 6 April 2020 but, on 17 March, the Government announced that the reform would be delayed by one year until 6 April 2021. As a result the measure was dropped from the bill for redrafting.
Conservative MP David Davis tabled an amendment to delay the commencement of the measure by a further two years to April 2023 but this was not voted on. Under the exceptional rules currently in operation in the House of Commons the Speaker did not choose to have a virtual division so it was only the small number of MPs present who had a say and it went through on the nod (ie no division). It is, however, quite likely that this issue will return at report stage.
Government speaker proposing the motion - Financial Secretary Jesse Norman MP
Moving the ways and means motion, Tax Minister Jesse Norman explained that the commencement of the measure was being delayed to April 2021 ‘in recognition of the effects of the coronavirus pandemic’.
Norman claimed that, in the private sector, non-compliance with current rules remains widespread, and it is forecast to cost the Exchequer more than £1.3 billion a year by 2023-24 if not addressed. He said: “it perpetuates an unfairness between individuals working in the same way but paying different levels of tax, and it prolongs the disparity with the public sector, where the rules have been in place now for three years.”
Reacting to the Davis amendment, Norman said ‘it is hard to see any genuine rationale for this further delay’. He went on to say the Government has carried out two consultations on the detail of the reform, HMRC have worked ‘extensively’ to support businesses in preparing for the change and draft legislation and guidance has been published. There was a further review earlier this year that resulted in several additional improvements, he said, adding: “By delaying until 2021, the Government have already ensured that businesses and contractors will not need to make final preparations for this reform until next year.”
The Government and independent researchers had not seen any evidence of an overall change in the demand for the services and skills of contractors since 2017 reforms were made in the public sector, he said. And many organisations will still choose to engage contractors using personal service companies where that is appropriate to their business. The Government will use the additional time given by this one-year delay to commission further independent and robust research into the long-term effects of the 2017 reform on the public sector. We want that research to be available before the reform comes into effect in other sectors in April 2021, he said.
The reforms themselves include a client-led status disagreement process, where contractors can lodge a complaint if they disagree with how they have been categorised and HMRC are continuing to help businesses to get their employment status determinations right by ensuring that they have access to a wide programme of education and support. HMRC have committed to a ‘light-touch’ approach to penalties in the first year of the reform and have stated in terms that the reform will not result in new compliance checks being opened into previous tax years unless there is reason to suppose or suspect fraud or criminal behaviour, and the same is true for penalties for inaccuracies, he added.
Proposing the amendment - David Davis MP
David Davis (pictured thanks to UK Parliament) said that, in April next year, self-employed contractors will be hit with ‘unnecessary costs, confusion and uncertainty, just as many of them are getting back on their feet after the coronavirus has wreaked havoc across the economy’. He quoted a report by House of Lords Economic Affairs Committee, which stated that the rules ‘have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed’.
Davis went on to warn of ‘zero-rights employees effectively created by the state’. The MP said the Taylor review proposals offer the best long-term alternative solution to the off-payroll rules. The Treasury has neither the time nor the capacity for a wholesale review right now, accepts Davis, ‘therefore, the only sensible course of action is to pause these reforms and take the time to properly review the impact they will have on the self-employed’.
SNP economic affairs spokesperson Alison Thewliss supported Davis’ call for a review. Thewliss raised the impact on rural communities where teachers, doctors and nurses may be employed through intermediaries, and concerns about the impact of these reforms on people working in the oil and gas industry, which is also under significant pressure at this time. She said many people working in IT are already finding that their contracts are not being renewed. The MP called on the minister to consider an equality impact assessment.
Dan Carden, Labour’s Shadow Financial Secretary, said Labour broadly supports the Government’s decision to delay and backed a ‘proper and thorough’ review before the roll-out to the private sector. Carden asked how reforms will only affect people working like employees through a company, and stated that there can be no space in our economy for zero rights employment. He said: “We need a joined-up approach in the consideration of tax regulations and employment law. We need better protections for the self-employed, and we need to tackle tax avoidance.”
Public Accounts Committee Chair Meg Hillier, Labour, said flexibility for contractors allows start-ups to get the help, support and technical skills they need as a fledgling business. Since the Government announced the extension of IR35 to the private sector, many companies in her London constituency have already taken the view that they need to move overseas, and many of the individual contractors are moving overseas, she claimed. Many of the companies that are employing those contractors are taking a very risk-averse approach, designating all contractors as needing to go under the IR35 umbrella. That is having a negative impact on those technically skilled individuals who would be available for work but will end up being employed for tax purposes only, with none of the perks, said the MP. She agrees with Davis that a delay of a year is not long enough because of the disruption of COVID-19, saying: “We need to delay this further or we will lose these skills, and businesses will not replace these roles as employees, so we will have a double whammy in the economy.”
Labour colleague Rachel Hopkins is ‘deeply concerned’ that IR35 reduces the rights of the worker and the responsibilities of the employer. It is essential that, during the review of IR35, the Government recognise the overlap between employment law and tax status, and do not see them as ‘exclusive entities’. Hopkins is aware that some workers are forced into self-employment by employers trying to cut costs and reduce their obligations. She said: “The COVID-19 crisis has created a critical juncture in our country’s economy. I urge the Government to ingrain workers’ rights and fair taxation into the post-COVID economy.”
Acting Lib Dem Co-Leader Sir Edward Davey said: “There should be a review, not just of IR35, but of how self-employment is viewed—the way we tax it and the benefits that people get—so that we can get a proper balance, rather than the piecemeal approach that we have.” Davey is wary of creating zero-rights employment. The public sector, its HR and payroll look at risks such as tax liabilities in a very different way from the private sector, he said. He added: “I think that this will end up costing the taxpayer and the country, and it will mean that there is less money for our public services if the measure goes through. It is the wrong measure at the wrong time. The Government should withdraw it, review and proceed in a wholesale—not this piecemeal—way.”
Government response - Financial Secretary Jesse Norman MP
Tax Minister Norman closed the session and encouraged all MPs who would like a further delay (as suggested by Davis) to reflect on the ‘intrinsic unfairness’ of taxing two people differently for the same work, the disparity that it would continue between the private and public sectors, and the significant fiscal cost that would be involved in doing so.
Norman clarified that there is no plan for any further ‘review’. Instead the Treasury is talking about two pieces of ‘research’. The first, later in the year to come before April 2021, will look at the long-term effects on the public sector. The second piece of research will come at the end, after the reform has been introduced in the private sector. It will be an early take on the effects on the private sector in the first 6 to 12 months of its introduction. He charged: “The measure will not merely improve the fairness and equity of the system, but allow us to fund our public services better.”
As indicated above, the amendment failed and the government motion was passed.
The full session is here.