Peers demand action on Taylor Review findings in follow-up report on off-payroll working

The Chartered Institute of Taxation and its Low Incomes Tax Reform Group (LITRG) had given evidence to the sub-committee as part of its inquiry shortly before Christmas (see – CIOT representative sets out need for employment tax codification, CIOT Blog, 17 December 2021). The report follows-up a previous inquiry which reported in April 2020 (see Peers urge government to rethink ‘flawed’ IR35 rules, CIOT Blog, 1 May 2020).

 Comments cited in this latest report are included under each relevant section.

Key conclusions

The sub-committee concluded that:

• The extension of the IR35 off-payroll working rules to the private sector from last April appears to have resulted in a corresponding increase in the use of umbrella companies
• HMRC research into the implementation and impact of the change should be accelerated, made more comprehensive and be published in full
• Government must adopt a more coherent approach to the issue of employment status to include both tax and employment rights. The committee describes the situation where a person can be treated as an employee for tax purposes but not for employment rights as “unfair” and recommends ministers adopt the recommendations of the Taylor Review of Modern Working Practices.

In a letter to Financial Secretary to the Treasury Lucy Frazer MP, the chair of the sub-committee, Lord Bridges of Headley, sets out in more detail the sub-committee’s findings. A summary can be found below.

Implementation and communication

Citing evidence from CIOT and LITRG (among others), the committee notes the challenges faced by businesses but welcomes the overall efforts made by HMRC to communicate changes to off-payroll working rules, especially so amidst the backdrop of the pandemic. Colin Ben-Nathan, chair of the CIOT’s Employment Taxes Committee, had told the sub-committee that HMRC had been “much better prepared” for changes in the private sector compared with their implementation in the public sector. Meredith McCammond of LITRG also acknowledged the creative and tailored approach taken to communicate the changes to different audience groups, as HMRC drew on the lessons learned from earlier communications efforts.

Check Employment Status for Tax (CEST) tool

The sub-committee has called on HMRC to acknowledge the limits of the CEST tool and said that, “in its compliance work, it recognises that the use of other means to assess employment status is both legitimate and reasonable.”

While the tool has been designed to be accessible, this means it is not always accurate and with around a fifth of users unable to have their employment status determined by it, the sub-committee recommends that more be done to provide advice and support to those who require further clarification of their employment status. In their evidence to the sub-committee, LITRG highlighted the fact that users needed to have accuracy from the tool, while CIOT added that there were limits in HMRC’s capacity to deal with queries from those unable to determine their status.

The sub-committee also highlighted that many users lack confidence in the results provided by the CEST tools, and has asked the government to engage with users to improve processes, particularly with respect to the “mutuality of obligation” test.

Status determination

Evidence suggests that the new off payroll working rules are having a detrimental impact on the labour market. Having heard evidence of businesses choosing to either not engage freelancers at all or to make a blanket call that every contractor is being within the scope of IR35, regardless of their individual circumstances, the sub-committee said it was “regrettable” that such decisions were bring “driven by tax, rather than commercial, considerations.”

By adopting a blanket approach, the sub-committee noted that contractors were failing to comply with the rules. But a fear of non-compliance had driven this type of activity, which had a consequential impact on the labour market. Because of this, the sub-committee has urged HMRC to take a tougher approach to such practices while continuing with its “admirable” approach of taking a light touch approach to enforcement with those contractors who have made “honest mistakes”. They also believe that HMRC’s compliance activity should ensure that appeals against decisions are properly handled.

Labour market impact

The sub-committee expressed concern about the impact of the changes on the labour market, and expressed scepticism over the government’s approach to dealing with the challenges faced by businesses and workers. It has recommended an expeditious review of the rules to determine their impact and that it should “invite input from affected contractors as well as engagers and intermediaries”.

Some of the issues encountered by the sub-committee in its follow-up evidence included freelancers choosing to remove themselves from the market as a result of these reforms; of specific sectoral challenges including “highly skilled STEM markets such as IT, life science [and] engineering”; additional external pressures caused by the pandemic and Brexit; and negative impacts on the flexibility of the labour market, with businesses now more reluctant to engage with contractors for fear of non-compliance with the rules. In his evidence, Colin Ben-Nathan highlighted the specific issue of employer’s National Insurance and in particular, how the cost is allocated between engager and contractor. He had further noted that this position was likely to be exacerbated by the introduction of the Health and Social Care Levy (which will begin as a 1.25 percentage point increase in NICs for employees and employers from this April).

Impact on businesses and workers

The sub-committee believes that HMRC has failed to appreciate the burden of costs the new rules are imposing on compliant companies. Witnesses had expressed concern that HMRC had persistently underestimated the one-off and continuing costs and burdens to businesses and workers.

The peers also expressed concern over a lack of responsibility among some businesses engaging contractors for employer’s National Insurance contributions. Given that IR35 had been designed to address this issue, they said: “in practice it seems many engagers are still not accepting this responsibility, but passing it on to contractors via reduced rates of pay. It is lower paid contractors with the least bargaining power who are most disadvantaged.”

Umbrella companies

The sub-committee expressed concern at the growing use of umbrella companies and the potential for the substitution of “one form of tax avoidance for another”. They were particularly concerned about the impact of “rogue” umbrella companies on the low-paid.

The sub-committee heard that an increasing number of freelancers were operating through umbrella companies. According to the evidence provided by LITRG, many of these are “very good” and provide a “safe harbour” for those affected by the changes in off-payroll working rules. But these changes have also led to concerns about less scrupulous umbrellas operating at high volume and low margin, and who can leave many contractors in “non-compliant and unlawful” situations. Colin Ben-Nathan, in his evidence on behalf of CIOT, said that publicity was “essential” in ensuring that workers are aware whether their scheme is complying properly with the rules.

Despite HMRC efforts to warn potential users of such schemes and a government consultation on the role of umbrella companies in the labour market, the sub-committee has accused ministers of being “slow to act”. They would also like to see action taken to bring forward the legislation that will create an umbrella company regulator.

Employment status

While the sub-committee agrees with the government that “everyone doing the same job should be paying the same tax”, they believe that this principle should be extended to include employment rights. They lament the fact that “no significant progress has been made” on the back of the Taylor Review and accuse ministers of being “focussed too narrowly on tax issues and not enough on wider issues of fairness.” This is why one of the key recommendations of the sub-committee is for the Taylor Report’s findings to be implemented in full.

Chris Young, CIOT External Relations