Lords Committee Criticises the Government’s IR35 rules

A report published by a House of Lords committee criticises the Government’s IR35 rules and demands they are delayed indefinitely until the policy’s “inherent flaws and unfairnesses” have been addressed. The report describes how some firms have made “blanket status determinations”, with some deciding not to use freelance contractors at all. Some workers have been left with none of the rights of an employee or the tax benefits of being self-employed, the report adds.

Despite delaying the private sector launch from April 2020 to April 2021 because of Covid-19, the Government’s IR35 support “falls well short of what is required”, the report scolds. The Lords, therefore, predict “widespread disruption”, “significant challenges” from testing IR35 status, and the “unfair” taxation of contractors.

“Given the dysfunctionality of the existing system, we call on the Government to use the extra time to rethink fundamentally its [IR35] approach,” say the peers, urging “wholesale reform”. The report says business is likely to need considerably longer than a year to recover from the disruption caused by the Covid-19 pandemic.

Cormac Marum, Head of Tax Advisory at Harwood Hutton, welcomed the Lords’ comments. “At last, somebody is beginning to talk sense about IR35,” said Cormac. “Sadly, it’s not yet the Government.”

Cormac took issue with a Treasury spokesman who said it was right to ensure that two individuals sitting side-by-side and doing the same work for the same employer pay the same tax and National Insurance contributions.

“The Treasury spokesman fundamentally misunderstands the long-established principles of UK taxation,” said Cormac. “Two individuals sitting side-by-side and doing the same work for the same employer should indeed pay the same tax and NI because they are employees and have the same employment rights. But two individuals sitting side-by-side and doing the same work for the same engager should not pay the same tax and NI as an employee because they are not employees and, crucially, do not have the same employment rights as an employee.

“Why do those individuals not have the same employment rights? Because employers do not want to face the burden of legal employment rights and, particularly, of paying employer’s national insurance.

Cormac said the Government risks wiping out the professional contractor sector of the economy if it presses ahead with its IR35 policy plans into the private sector. “And that is certainly not what is wanted once the economy seeks to rebound after the lockdown restrictions are eventually lifted.”

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LORDS: WHOLESALE REFORM OF IR35 REQUIRED

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