Lords talk of reviewing ‘devastating’ IR35 reform’s few key aspects

Peers could be looking at tabling two or three very specific policy recommendations on IR35 reform to make it more palatable for limited company contractors.

Told PSC numbers “fell off a cliff” in the few months preceding and eight months subsequent to the April reform (falling from 60,000 to 41,000 at the FCSA), Lord Bridges asked:

“If you were the financial secretary [to the Treasury], would you be telling your officials ‘here are three aspects of how the policy is being implemented that I’d like you to review?’”

'CEST, Status Disagreement Process, Injustice'

As chair of the Lords Finance Bill Sub-Committee, the peer volunteered at Monday’s first off-payroll inquiry oral evidence session, that one such aspect might be “CEST.”

But another Tory, Lord Butler, sounds keen for a newer aspect of the April legislation – the Status Disagreement Process (SDP) – to also be part of the committee’s recommendations.

“The contractor disagreed with [a sudden change from outside to inside IR35]; found indeed errors [in the new SDS]; appealed…but the engager said, ‘take it or leave it,’” the peer began, recalling an anonymous submission to the committee.

“The contractor [therefore] had no appeal against it; they couldn’t appeal to HMRC. There was no further [redress]. Now, that sounds to me like an injustice.”

'What this process really needs'

Andy Chamberlain, director of policy at IPSE, said that contractors could perhaps convince their clients to commission an external IR35 contract review but, potentially, must foot the bill.

“You are quite right though,” he told Lord Butler, “there’s no access to HMRC or some other independent arbiter, which is what this [process] would really need.”

The Federation of Small Businesses, which also gave evidence alongside IPSE and the FCSA, spoke of “people manipulating the tool to try to get the [appropriate] answers”.

'Extremely hard'

One CEST question was said by Mr Chamberlain to be far too heavily weighted towards returning an inside IR35 determination.

And in line with the prospect of them eventually recommending just a few distinct policy tweaks to HMRC, the peers demanded to know which CEST question.

“The question is…‘Do you have a right to reject a substitute?” Mr Chamberlain obliged. “And if the client says ‘yes’…it’s extremely hard [to avoid receiving an inside IR35 result].”

'Unless HMRC gets a grip on bogus umbrellas'

This answer got an inflected tone of interest from Baroness Kramer of the Liberal Democrats, and a “very good” from chair Lord Bridges.

But it was the Tory peer Lord Butler who moments later was unsettled by a submission from the FSB’s policy and advocacy vice-chair Martin McTague.

“The pressure that’s going to come from non-compliant umbrellas, I think will make it very difficult for compliant umbrellas to carry on.

“I think it will erode their ability to trade. And I think, ultimately, unless HMRC gets a grip of these bogus umbrellas, the whole thing will collapse,” he said.

'The bad is going to drive out the good'

Lord Butler shot in: “I was hoping you were going to say that the good [umbrellas] would drive out the bad [umbrellas]. But you’re saying the bad is going to drive out the good?”

“I think the bad have got more power,” Mr McTague clarified, before an explanation from FCSA’s Phil Pluck that ‘good’ umbrellas can’t compete on take-home pay.

Asked specifically by the committee for “solutions” having heard lots of “problems” of IR35, Mr Pluck replied: “I would say in an ideal world, rip it up [the legislation] and start again.

“But from my discussions with various government departments and HMRC, that’s not going to happen. So let’s…[try to] get HMRC to recognise that they’re not the experts in this.

“They’re created CEST and should call it guidance but they should actually allow… [for industry] status determination tools…and tribunal case precedent…[to both] start to dictate”.

'Negatives far outweigh the positives'

Asked the same question, IPSE’s Mr Chamberlain said it would be best to repeal the legislation and start over, because the “negatives far outweigh the positives.”

Yet earlier on in the session, he offered to the solutions-focused Lords:

“If it is just [all] about people paying the correct amount of tax, then [HMRC] should look at how people pay tax and how businesses pay tax, and ensure we have a transparent system.

“Rather than…what [they’ve] done…which is just to say ‘let’s try and shove as many people as we can onto a payroll, somewhere. Which seems to be the end-game of this legislation.”

'Devastated'

The impact on people running their own PSC “swept up” in engagers’ risk-averse reactions to the reform has been “huge,” added Mr Chamberlain, who said individual contractors were “devastated.”

“You had a bad situation and you’ve just made it worse,” echoed the FSB’s Mr McTague, as if almost addressing HMRC. He described the legislation as “confusing, opaque, difficult.”

Ending the session wearing a sombre expression, and underlining the need for a change in the UK’s rules he added: “I had the impression we had a competitive advantage before [IR35 reform]. And we’ve lost it.”