Has coronavirus given us a reason to rethink the taxation of work?

28 April: As COVID-19 dramatically changes the way in which we work, the House of Lords is recommending that the government rethinks IR35’s expansion and looks for a better way to tax work. Anita Monteith outlines the recommendations.

It seems a very long time ago, but it is only 12 weeks since The House of Lords Economic Affairs Finance Bill Sub-Committee launched its inquiry into off-payroll working  .

Since then, the off-payroll working rule changes contained in Finance Bill 2020, have been eclipsed by the coronavirus pandemic, with IR35 pushed out of the minds of most tax professionals, businesses and those workers who will be affected.

Extraordinarily, it took just four weeks for many of us to find the way in which we work changed forever. While the sub-committee may have envisaged a slightly slower pace to a different future, it really could not be a better time to publish its report: Off-payroll working: treating people fairly.

The committee suggests that the government needs to consider the damage that may be done to the diversity and flexibility of the labour market if it goes ahead with IR35 proposals as currently designed. There is clearly serious concern, yet again, that the way we tax work in the UK needs a fresh look.

Rather damningly, the first sentence of the report says: “The IR35 rules - the government’s framework to tackle tax avoidance by those in ‘disguised employment’ - have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed.” From April 2020, the government had planned to extend the off-payroll working rules being used in the public sector, to large and medium-sized entities in the private sector. As things stand, the rule changes are postponed until April 2021 .

The inquiry leading to the House of Lords’ report was in response to the government’s plans as being legislated in Finance Bill 2020. The report suggests continuing the work of the Taylor Review, developing its ideas to be responsive to the changing labour market and to find a solution that could work for both tax and employment law.

The sub-committee also recommends undertaking an independent review of the implementation of the off-payroll rules in the public sector and analysing the impact of those rules on the labour market. We need to learn from the past three years, because how the government’s proposals affect the decisions businesses and contractors make, will be important for deciding how we tax work in the future.

The report comments: “Any future review of the impact of the measures must take into account the wider impact of the changes on the UK’s labour market and the broader economy.”

The subcommittee also points out the risks associated with engaging umbrella companies, the ongoing deficiencies of the service to check employment status for tax (CEST) and the status determination process, as well as possible underestimates in the government’s assessment of the costs to business of the proposals. Perhaps this report really is a call to stop and reflect on a new direction?

It concludes that in the extra year before any change takes place, we should look again at alternatives to the off-payroll rules that are fairer and less risky, and which foster a flexible workforce in which contractors play a vital role.

To give certainty to business, it says that the government should announce by October 2020 whether it will indeed implement the off-payroll rules in April 2021, or whether any ongoing impact to the economy resulting from the COVID-19 pandemic will require their implementation to be delayed further.

It also argues that the government designs a short-term means of raising revenue that will not prove burdensome for businesses as they emerge from the COVID-19 pandemic, and a long-term alternative solution to the off-payroll working rules. In so doing, they should apply the following six principles:

• Certain: the complexity of the off-payroll rules and the limitations of the CEST tool mean that it is difficult for clients and contractors to be certain about their position. All parties should have certainty about the tax treatment that will apply.
• Simple: the off-payroll rules are too complicated. Any solution should be as simple as possible.
• Fair: the proposed off-payroll rules are unfair because they treat contractors as employees for tax purposes only, essentially creating “zero-rights” employment. Treatment as an employee for tax purposes should only apply where there are employment rights and risk-sharing between employer and contractor.
• Supportive of growth: any solution should respect and preserve the flexibility that exists within the UK labour market.
• Administratively straightforward: the burden that the off-payroll rules imposes on clients is unreasonable. Any alternative needs to be straightforward to operate, and not excessively burdensome to administer.
• Enforceable: with limited resources IR35 became impractical for HMRC to monitor and enforce. Any new proposal should be manageable for HMRC.

ICAEW is pleased that the Lord's report closely reflects our own view on the tenets necessary for good policy in the tax system. These principles have never been more important, as never before has there been a clearer call to action for tax change.