Peers call for more research on impact of off-payroll reforms

Peers debated (in Grand Committee) a report from the House of Lords Economic Affairs Committee on ‘Off-payroll working: treating people fairly’, which was published back in 2020. From April 2017, public authorities became responsible for deciding if IR35 off-payroll rules applied where they contracted workers who provide services through an intermediary. And a year later than planned, in April 2021, medium and large-sized clients outside the public sector also became responsible for deciding if the IR35 rules apply. Given the time since the 2020 report, this week’s debate was actually a wider discussion of the off-payroll rules, five years on from the original reforms.

Chair of the committee Lord Bridges of Headley has continuing doubts about the Check Employment Status for Tax (CEST) tool and called for its improvement. But he said that it ‘cannot and should not be a substitute for law’. He is concerned about the continued absence of questions on mutuality of obligation within CEST and CEST’s 20 per cent undetermined rate which means that a significant number of people need additional support to identify their status. The Conservative peer said tougher compliance action is needed where engagers are effectively evading their obligations under the rules to make individual determinations. He is concerned that there is not a clear legal route to appeal against an engager’s decision. He quotes HMRC as saying appeals can take ‘years’ to resolve if complex.

Bridges suggested that any research into the impact of the measures must consider changes in the UK’s labour market and the broader economy. The actual cost of these changes on business is still unclear and there is no evidence that this change is supporting growth. For the lower skilled end of the market, it seems to him that many engagers are passing costs on to contractors via reduced rates of pay. It is these lower paid contractors who are falling into the ‘clutches of rogue umbrella companies’. The Government should commit to a date for introducing legislation to create the proposed single enforcement body to regulate umbrella companies, he said.

HMRC assessed that the loss of tax from non-compliance with IR35 could cost £1.3 billion. It now states that improved compliance raises much more, £4.1 billion in 2024-25, so it appears to Lord Bridges that revenue raising, not simply protecting the tax base, has become the main driver of changes.

In other comments Lord Bridges said it is unfair to tax individuals as employees while denying them the rights of employees and that a failure by government to address the issues in the Taylor review ‘has created the muddle we are in today’. He said: “The need to properly define employment rights for the purposes of both tax and employment is now ever more urgent.”

Baroness Noakes, Conservative, said the latest set of actions that, in effect, outsource IR35 compliance to employers has produced a new form of unfairness – ‘namely, the creation of a class of zero-rights employees’ (these are contractors who are not technically employees of the engaging employer but are brought on to the payroll for tax purposes). The Government’s sole focus on collecting tax has also resulted in employers pushing workers into the use of umbrella companies, said Noakes. The off-payroll rules themselves have distorted the labour market and may well have diminished the ‘prized’ flexibility of the UK labour market. She said: “A fundamental reform of the taxation of income, including national insurance, is now long overdue. It is the root cause of the problems with IR35 and the many types of unfairness that IR35 promulgates.”

Lord Balfe, Conservative, said a new Queen’s Speech is an ideal time for the Treasury to try to get to grips with the whole problem of how you treat people who are earning money from others. Balfe called for a ‘root-and-branch’ look at the ways in which remuneration is paid and rights are given to and taken away from people.

Lord Tunnicliffe, Labour, said there are genuine fears around the exploitation of workers, particularly those on low incomes, as people seek to avoid tax through ‘rogue’ umbrella companies and, indeed, former employers seek to avoid tax by forcing low-paid workers into these unsatisfactory conditions. Addressing these questions is therefore increasingly urgent, he said. Tunnicliffe said the committee has called for an off-payroll working regime which is simpler, fairer, more straight- forward, properly enforceable and provides greater certainty to all involved.

Lord Desai, Non-Afl, said we should find a way of distinguishing between different incomes, not so much by size but by variability over a period. Desai is calling on HMRC to conduct an empirical study of different kinds of employment and incomes and ‘genuinely’ establish the variability of employment prospects and income. We need proper anthropological research into what kinds of employment and incomes there are in this economy, he said.

Baroness Bowles of Berkhamsted (photographed below by Parliament UK), Lib Dem, opined that HMRC have looked only at tax and NICs contributions, not at rights, responsibilities, risks or benefits. They rejected a new kind of body, as suggested in the Taylor review, but then created one by carving out an ‘employee just for tax purposes’ that brings manifest unfairness to the individual and condones undermining employment protections.

Bowles called for exemptions for microbusinesses and start-ups, ‘so as not to apply tests that are inappropriate and clearly discriminatory to the circumstances’ For example, could there be a three-year period of consideration before any assessment and determination starts, or exemptions for small turnover that rules out looking at a building-up phase, she said.

Responding to the debate, government spokesperson Baroness Penn said HMRC estimated that only one in 10 people who should have been paying tax under the off-payroll working rules were paying the right amount, prior to the reforms. The reform does not create a new tax on contractors or change the principles of tax status in any way, she told peers. Evidence suggests that the reform is successfully achieving its primary objective to ensure fairness and improve compliance with existing rules, she claimed, pointing to it having resulted in additional tax revenue of £250 million in 2017-18 and £275 million in 2018-19.

On Baroness Bowles’ call for an exemption for micro-businesses or start-ups, Penn said the Treasury did decide not to include 1.5 million small businesses in the reform’s scope.

HMRC has not seen any evidence of the widespread use of blanket determinations, which is supported by its internal data and external research, said Penn: “In fact, HMRC compliance activity has found that many public bodies did take reasonable care when implementing the rules.”

The CEST tool was rigorously tested against known case law and settled cases, and money spent on improving it, she said.

The Government has commissioned external research into the 2021 reform that will gather further information on the effects of the reform on the way contractors are engaged, rates of pay for contractors, challenges with implementing the rules and the effectiveness of HMRC’s support and guidance. This will ask for information on the reasons for any changes in the use of contractors since March 2021, including COVID-19.

The Government has published guidance for those working for and with umbrella companies and have also recently completed a call for evidence on the umbrella company market.

She added: “It is worth emphasising that the current employment status frameworks for both tax and rights work for the majority of individuals and businesses. However, we recognise concerns about employment status, and we are considering options to improve clarity, making it easier for individuals and businesses to understand which rights apply to them.”

The session is here.

By Hamant Verma, CIOT Senior External Relations Officer