Government should reform IR35 because rules are riddled with unfairness, says leading figure in House of Lords

THE Government should reform its off-payroll working rules because they are riddled with unfairness, according to a senior figure in the House of Lords.

Lord Bridges of Headley made the comments as the House of Lords Finance Bill Sub-Committee invited contributions to its new inquiry on the implementation of controversial rules - known as IR35 - in the private sector.

The inquiry will examine whether the recent extension of the off-payroll working rules to the private sector has made it more difficult for businesses to hire people with the right skills and expertise.

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The House of Lords Economic Affairs Committee appoints a Finance Bill Sub-Committee each year to inquire into the draft Finance Bill.

It will also consider to what extent its introduction has contributed to job vacancies.

The off-payroll working rules are designed to ensure individuals working like employees but through their own limited company - often known as a ‘personal service company’- , or other intermediary, pay broadly the same Income Tax and National Insurance contributions (NICs) as individuals who are directly employed. These rules are commonly known as ‘IR35’.

Lord Bridges, who chairs the sub-committee, said: “Our previous inquiry found the Government’s off-payroll working rules to be riddled with problems, unfairnesses, and unintended consequences. We called for the wholesale reform of IR35.

“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.”

The Government is proposing a new employment body with powers to enforce employment rights, including for those engaged by agencies and umbrella companies. The peers are seeking evidence about how effective such a body would be in ensuring workers, particularly the lower paid, are treated fairly.

This is a follow-up to the sub-committee’s report from 2020, ‘Off-payroll working: treating people fairly’, on the Government’s proposals for moving responsibility for assessing compliance with its off-payroll working rules (IR35) from contractors to those who engage them.

This report concluded that IR35 - the Government’s framework to tackle tax avoidance by those in ‘disguised employment’ - has not worked properly throughout its 20-year history.

Many witnesses told the committee that the rules had made them “zero-rights employees” with none of the rights of being an employee, or the tax advantages of being self-employed.

Lord Forsyth of Drumlean, the Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said the potential impact of the rules on the wider labour market, particularly the gig economy, has been overlooked by the Government.

The peers concerns are shared by Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, who said the self-employment tax rules were needlessly complex.

Jesse Norman, the former Financial Secretary to the Treasury, defended the Government’s record in a debate over the Finance Bill.

Mr Norman told MPs that the changes to IR35 that the Government has made have in some quarters been widely welcomed.

Mr Norman quoted the off-payroll advisory firm Qdos, which said: “In recent months the tide has turned, with thousands of businesses now aware of the fact that IR35 reform is manageable”, as it was manageable in the public sector some years before.”

However, Meg Hillier, the Labour MP for Hackney South and Shoreditch, said IR35 had decimated sections of the tech and IT industry in her constituency.

The Finance Bill Sub-Committee is particularly interested to hear from bodies that represent businesses that engage workers to whom the off-payroll working rules might apply.

The House of Lords Economic Affairs Committee appoints a Finance Bill Sub-Committee each year to inquire into the draft Finance Bill.

The Sub-Committee’s inquiries focus on technical issues of tax administration, clarification and simplification.

The deadline for submissions to this inquiry is 15 November 2021.

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