Lords reprobe off-payroll rules, ahead of NAO looking for IR35 ‘lessons learned’

The new IR35 off-payroll rules for the private sector are to be investigated -- firstly by the House of Lords Finance Bill Sub-Committee, and secondly by the National Audit Office.

Posted on the cusp of Autumn Budget 2021, on October 22nd and October 9th respectively, the two separate inquires will each focus on the April 2021 “implementation” of the rules.

'Lessons HMRC has learned'

But for being wider than the NAO’s probe, which will explore “lessons HMRC has learned” from the public sector’s adoption of IR35 reform, the peers’ probe is exercising experts more.

Technically a follow-up, the peers’ probe is also more pressing given the Lords want to hear from contractors by Nov 15th 2021,whereas the NAO inquiry is not until “winter 2022.”

Unifying both investigations however, and unfortunately for parties affected by IR35 who want to see change, the experts are pessimistic about the outcomes.

'Here we go again'

Status adviser Kate Cottrell says she’s ‘not holding her breath,’ partly as the Lords were previously damning of the rules, meaning  “all we can hope for now is that the government takes notice this time around.”

She continued: “Hats off to the Lords for announcing a follow-up to their excellent original report which slammed the government for not evaluating how the rules had worked in the public sector before rolling them out to the private sector.

“But it very much feels like ‘here we go again.’ How many more times does the government need to hear that IR35 and the off-payroll rules are a complete mess, and arguably already responsible for messing up another Christmas, with the exodus of all those HGV drivers?”

'Significant disruption'

The Bauer & Cottrell co-founder added in a statement to ContractorUK: “[Right on the money] the Lords warned of significant disruption if the off-payroll rules went ahead. 

“What a brilliant read it will be when their next report is published. It will be another major embarrassment, in my view, but unlikely to result in any government reform to IR35.”

Rebecca Seeley Harris, a tax lawyer, similarly expects little change on the off-payroll front once the Lords committee concludes with its ‘recommendations’.

'Doesn't mean the government will listen'

“This is an ideal opportunity to [give] feedback to the sub-committee, although it still doesn't mean the government will listen,” she cautioned on LinkedIn yesterday.

In a statement afterwards to ContractorUK, the author of CEST Explained said her ‘no change’ forecast was despite the peers being set to ask some “robust and pertinent” questions.

In fact, eight multi-faceted questions are posed by the peers to help focus contractors’ submissions -- on CEST; hiring issues, costs, and HMRC, among other areas.

'IR35 was never about fairness'

Due to chair the committee’s inquiry, Lord Bridges of Headley said: “We’re carrying out this follow-up inquiry to find out about the experiences of engagers and contractors to date. 

“We want to hear particularly from representative bodies about the experiences of individual contractors.” 

As if to help the Lords get off the mark, one contractor posted: “IR35 was never about fairness or any of the other claptrap HMRC or the Treasury trot out.

“It’s all about forcing the populous into PAYE, which HMRC can automate, and away from complicated self-assessments. And to hell with those whose lives are ruined in the process.”

'Riddled with problems'

Launching the new inquiry this month, Lord Bridges acknowledged that the committee’s initial report found the April 2021 off-payroll rules were “riddled with problems, unfairness and unintended consequences.”

“I very much expect the follow-up inquiry will arrive at a very similar outcome,” Chris Mattingly, chief executive of IR35 Navigator told ContractorUK yesterday.

“Since the reforms were implemented in April, we have seen very few engagers willing to embrace the new rules, instead choosing to ban the use of limited company contractors.

“This has forced many engagements inside IR35 by default, meaning many contractors have had little choice but to work through an umbrella company. And as the umbrella sector is not currently regulated, we can only assume many more contractors will have fallen prey to tax avoidance schemes.

“For this reason alone, I think the reforms will be deemed [by the Lords to be] a failure on all sides.”

'Peers knew about departmental IR35 investigations'

Since the peers’ initial report, many millions of pounds have been handed to HMRC by government departments for getting IR35 and their CEST assessments wrong, observes Ms Cottrell.

A former HMRC inspector, she reflected: “These investigations must have been known about while the Lords committee were investigating, but no doubt confidentiality prevented such disclosure at the time. 

“[However to duck answering difficult follow-up questions from the peers, the fear now is that the government] will just refer peers to the forthcoming inquiry by the NAO, deferring any and all commentary until then.”

'Lip service'

Yet the NAO inquiry appears to inspire even less optimism in its potential to result in meaningful change or improvements.

“Any [National Audit Office] review needs to be thorough and focus on the processes that public sector bodies have in place to manage the changes,” says status advisory Qdos.

“Previous reviews into IR35 have either been lip service by the government or, in the case of the Lords’ [2020] review, largely ignored by policymakers.”

The advisory’s CEO Seb Maley added: “How exactly the NAO intends to investigate the success -- or failure -- of reform holds the key. So, [there is] some reason for optimism perhaps, but I won’t hold my breath.” 

'HMRC aren't learning any IR35 lessons at all'

An IR35 contract reviewer, Mr Maley warned that the NAO review will be a “waste of time” should its officials regard “increased tax revenue” as evidence of “increased [IR35] compliance.”

ReLegal Consulting, run by Ms Seeley Harris echoed: “Wanting to know what lessons HMRC has learned from the public sector implementation of the IR35 reforms [is fine]. 

“But the Revenue doesn’t seem to be learning any lessons at all. For HMRC however, [IR35 reform] is working – in so far as they are collecting more tax.”

An adviser on the client-side of IR35 reform, the lawyer added: “Yet for engagers -- employers and organisations up and down the country, that is not the point.”