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House of Lords sub-committee: “A wholesale reform of IR35 is required”

With the time available, due to the deferral of the IR35 extension, government should “completely rethink this legislation”, according to a Lords sub-committee.

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'IR35 rules are riddled with problems, unfairnesses, and unintended consequences'
'IR35 rules are riddled with problems, unfairnesses, and unintended consequences'

The House of Lords Economic Affairs Finance Bill Sub-Committee, which investigates technical issues of tax administration, clarification and simplification, has today published a report titled “Off-payroll working: treating people fairly”.

 

The reformed off-payroll working rules, known as IR35, were due to be extended to the private sector in April, but the government announced they would now come into effect from April 6 2021 because of COVID-19.

 

The rules will move responsibility for determining whether PAYE/NICs should apply from the personal services company (PSC) to the engager (the client) and for deducting the correct amounts to the party paying the PSC (the fee payer).

 

However, the sub-committee said the government’s framework to tackle tax avoidance by those in “disguised employment has not worked properly throughout its 20-year history”.

 

The report finds that the government has not sufficiently analysed the unintended behavioural consequences of the proposed reforms.

 

It summarises that 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 is, therefore, calling on 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.

 

Lord Forsyth of Drumlean, chair of the 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.”

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