IR35: Lords say government is slow, evasive, and must fix ‘unfair’ off-payroll rules

Frustrated peers are echoing the NAO’s criticisms of IR35 reform, and the government’s handling of it, but in harsher terms -- perhaps in the hope that this time, ministers will listen.

On the costs of 2021’s off-payroll rules for example, whereas the NAO said HMRC “may” have underestimated the costs, the Lords say HMRC undoubtedly did fail to grasp the costs.

'HMRC has failed, must address problems'

“We believe that HMRC has failed to appreciate the burden of costs that the new rules are imposing on compliant companies,” the peers tells HM Treasury in a letter.

Lucy Frazer, the financial secretary to the Treasury, is further told by the Lords that HMRC’s future compliance activity now “needs to focus on the handling of appeals by engagers”. 

This is because peers are sympathetic to “concerns” about “blanket assessment and the engager-led appeal” process, so much so that HMRC “needs… to address these problems”.

'Not convinced government is confronting IR35's challenges'

Across 14 pages, the Lords also tell Ms Frazer they are “not convinced” government “is confronting the challenges that both businesses and workers face because of the new rules.”

And where officials and ministers aren’t being evasive, peers say the government “has been slow to act”, albeit specifically against the “harm” posed by “non-compliant umbrella companies.”

This is “increasing the risk,” says the Lords’ Economic Affairs Finance Bill Sub-Committee, that people -- especially those on low incomes -- are being forced from frying pan to fire.

'Substituting one form of avoidance for another'

“Lower paid workers [trying to avoid IR35 are] more likely to be persuaded to be lured into unlawful schemes, because they are offered highly plausible solutions,” they began.

“[These] show how they might increase their income at a time when their finances are under pressure. Paradoxically, this appears to substitute one form of tax avoidance for another.”

It is such short, sharp criticisms of HMRC which the peers will be hoping -- this time -- have cut-through.

Their recommendations are equally no-nonsense, such as: “Government needs to commit to a date for bringing forward legislation to create the proposed Single Enforcement Body to regulate umbrella companies.”

'Disappointing'

The same Lords probed the off-payroll rules two years ago, and concluded with a less-than-glowing review which, seemingly, was ignored by Ms Frazer’s HM Treasury and HMRC.

“It is disappointing that nearly two years on from our earlier report, no significant progress appears to have been made in addressing the wider issues around employment status”, the sub-committee tells the minister.

Clearly frustrated at not being listened to and now having to repeat themselves, the peers add: “In taking forward the off-payroll working reforms, the government has focussed too narrowly on tax issues and not enough on wider issues of fairness.

“The sub-committee reaffirms its earlier recommendation that the government should implement the Taylor Review proposals.”

'HMRC got its retaliation in first'

Chris Mattingly, CEO of IR35 Navigator, has taken to LinkedIn to excerpt the Lords’ take on umbrella companies (in effect, that government has been too slow to act) and on employment status (in effect, that the peers’ backing of Taylor was ignored), indicating that these two aspects are among the sub-committee’s most critical findings.

Writing today about the Lords’ letter, tax lawyer Rebecca Seeley Harris picks up their same findings on umbrellas and status, which are issues the government was previously asked to act on but hasn’t. Her op-ed is exclusive to ContractorUK and is available here.

Yet Graham Webber, director at WTT Consulting worries that a narrative from the government to forge ahead with the off-payroll rules despite the new recommendations to intervene has already been put in place.

“HMRC got its retaliation in first [before the Lords and NAO],” he says. “[They] produced their own report a couple of week ago which claimed a huge success for the IR35 policy.”

'Lords' letter supplements NAO's criticisms'

But like tax lawyer Ms Seeley Harris, who argues the government is out of excuses to not take action to revise IR35’s operation by HMRC, former tax inspector Andy Vessey believes the evidence must now be indisputable, given that it’s been tabled twice in as many weeks.

Head of tax at Kingsbridge, Mr Vessey explained: “The House of Lords Economic Affairs Finance Bill Sub-Committee’s letter to the Financial Secretary to the Treasury dated 9th February supplements the NAO report. [Together they provide] a much clearer picture as to the true effect of the off-payroll rules to date.”

Seb Maley, CEO of Qdos agrees: “Like the National Audit Office’s investigation into public sector [IR35] changes, this report [from the Lords] is comprehensive, conclusive and largely critical of IR35 reform -- along with the government’s handling of it.”

“Reform is creating zero-rights employment, which the government must address,” added Mr Maley, referring to the Lords finding that the government has created a “mismatch” between tax law and employment law.

'CEST needs an overhaul'

The IR35 contract reviewer continued: “[And further according to the peers] CEST continues to cause problems and the tool needs an overhaul.

“I could go on…[because] in truth, there are [only a very] few positives to take from this report. What matters now, is that the government takes these recommendations [from the Lords] seriously.”

The sub-committee’s chair Lord Bridges of Headley wants action too, in the first instance by March 9th -- the date he requests Ms Frazer provides him a “detailed response” by.

'Government must act on this unfairness'

“The government must take action to protect workers from ‘rogue’  [umbrella company] operators as a matter of urgency,” the Tory peer said.

“The government has said it is committed to fairness in the workplace. However, it is unfair for individuals to be treated as employees for tax purposes without having employment rights.

“Our sub-committee reiterates the call we made in our 2020 report for the government to press ahead with implementing the proposals set out in the Taylor Review.”

'Carefully review'

A government spokesperson told ContractorUK: “The government welcomes the committee’s follow-up inquiry into the impacts of the off-payroll working reform introduced in April 2021.

“The government will carefully review the conclusions and recommendations of the inquiry and will respond to the committee in due course.”