A House of Lords committee has called on the government to “completely rethink” a controversial tax reform which will have sweeping implications for North Sea contractors.
In March, the Treasury decided to postpone the changes to off-payroll working, known as IR35, until next year in light of the Covid-19 outbreak.
The Lords’ Economic Affairs Finance Bill sub-committee has now called for a “wholesale reform” of IR35, accusing the government of making its decision “too narrowly in terms of its tax take” and “overlooking” the impact on the labour market.
In a report published today, the committee described the rules, due to come into place next April, as “inherently flawed and unfair”, with some contractors already being laid off despite the delay.
The committee described how some firms, including those in oil and gas, have made “blanket status determinations”, and some deciding “not to use freelance contractors at all” in light of the reforms.
Some workers have been left as “zero-rights employees”, with none of the rights of an employee or the tax benefits of being self-employed, the report added.
The Treasury said it’s IR35 reforms have been widely consulted on and it would respond to the report in due course.
Ministers have also been called on to announce by October whether the Covid outbreak will further delay IR35.
Committee chair, Lord Forsyth, 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.
“The rules were deferred for a year because of the current crisis, but how prepared will businesses recovering from the crisis be to take on this extra burden on next year? The Government needs to think this through very carefully. We call on the Government to announce in six months’ time whether it will go ahead with reintroducing these proposals.”
If implemented next April, the committee said research on its impact should be carried out 18 months later, not six months as originally planned.
A Treasury spokesman said: “It is 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.
“Those who don’t comply with the off-payroll working rules pay significantly less income tax and NICs than an equivalent employee, and the cost of this non-compliance deprives our public services of vital funds.”
IR35 is designed to tackle tax avoidance by those in “disguised employment”, with the rules first introduced in 2000 and put in place in the public sector in 2017.
From April next year, large and medium-sized private sector businesses will be responsible for determining the status of their workers, with penalties for non-compliance.
For the North Sea, this will impact workers who have their own personal service companies, in certain cases working through a single employer, especially with some firms having decided they won’t use freelancers in light of the reforms.
The report also described tools for determining employment status as “falling well short” of requirements.
However, the committee agreed “it is right that everyone pay their fair share of tax”, instead recommending that work on the Taylor Review is continued.
That 2017 review, led by Matthew Taylor, chief executive of the Royal Society of the Arts, made a series of recommendations into modern working practices.
These included a classification that people employed by platform-based companies like Deliveroo be classed as dependent contractors, adding that there should be a distinction between these workers and those who are genuinely self-employed.
The Lords report adds: “The Government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off‑payroll working rules which we lay out in this report”.