Coronavirus and Off-Payroll Working in the Private Sector - Criticised Reform Is Delayed, But Not Cancelled

The effect of the reform is that independent contractors contracting through an intermediary (for example, a personal service company) are taxed as employees, where the nature and conditions of the work undertaken would amount to an employment relationship with their client in the absence of that intermediary. The reform is a tax reform only and does not afford the contractor any employment rights. The onus of compliance shifts so that it is the client, rather than the contractor, who makes the assessment as to tax status and makes deductions from pay as appropriate.

The reform was introduced in the public sector only with effect from 6 April 2017. Whilst HMRC consider that the reform in the public sector has been a success, clients and contractors are highly critical of the reforms.

Criticisms from the House of Lords

In April, the House of Lords Economic Affairs Committee, Finance Bill Sub-Committee issued a highly critical report (Off-payroll working: treating people fairly). The Sub-Committee requested to delay the reform in the private sector further and consider fairer options. It called on the Government to implement its stated intention to ensure that taxation of labour is more consistent across different forms of employment and there is ensure a fair balance between tax, rights and risk - being a key recommendation of the Taylor Review.

The House of Lords report concluded that the reforms were a revenue raising exercise and that the Government had elected to press ahead with the roll out to the private sector without full analysis of the effects of the reform, and no proper understanding of the impact of the reforms in the public sector.

The report further notes that the reform is built on the IR35 regime, which "has not worked properly throughout its 20-year history" and which HRMC has difficulty enforcing. Accordingly, in pushing the onus of compliance onto the end clients, the reforms effectively privatise tax compliance. The Sub-Committee concludes that IR35 rules are "riddled with problems, unfairnesses, and unintended consequences" and should be overhauled.

What Was the Government's Response?

Without specifically referring to the report, the Government has since reaffirmed its commitment to the reform in the private sector. However, it has also indicated an intention to further research the long-term effects of the reforms in the public sector before the reforms take effect in the private sector. We may therefore see further developments in this matter before April 2021.

What Should You Do Now?

Organisations should therefore look out for developments in this area and take the opportunity of the delay to assess and audit their use of contractors within their business - and consider their options in the event that the reform goes ahead in 2021.

For specialist legal advice on off-payroll working rules (IR35) in your organisation, please contact Charlotte Rose in our Employment Law team on 07741 311 065, or complete the form below.