Off-Payroll Working (Economic Affairs Committee Report)

Baroness Bowles of Berkhamsted Excerpts

Wednesday 27th April 2022 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I was a member of the Economic Affairs Committee and the sub-committee at the time of this report and I mainly want to address those principles. I agree with the analysis of what has happened since, which has already been brought forward by other members, referring back to the principles. The problem is that IR35 has not worked from the start and, as the noble Lord, Lord Bridges, explained, it is still not working fairly.

A key issue in the IR35 space, as has already been said, is non-compliant umbrella companies. The Financial Secretary to the Treasury told the committee that HMRC recognised umbrella companies as a strategic risk in its compliance plan. Note that “compliance plan”, its tax-collecting plan. It is clear that HMRC had only a tax-collection perspective, rather than what might be compared to a consumer or worker protection perspective and fair treatment.

We should not forget that non-compliant umbrella companies brought us the loan charge, effectively scamming people. How HMRC handled that is still among the most egregious injustices of recent times. Its treatment was tantamount to, “It doesn’t matter that you were, in effect, swindled; here is your extra tax bill because we cannot find the swindler or the client company, so it is all on you”. HMRC caused ruin and suicide by the intransigence of its perspective. That is unforgivable.

When it comes to IR35, and individuals and small businesses in particular, there is a valid comparison with consumer protections when the biggest financial risk to which individuals are being exposed is around their work, how they are paid for it, and when employment law and its benefits are not applicable. But then, you do not get the same kind of protection that you would, for example, if you put that amount of money at risk in a financial service fund.

Against that background, I would like to know more about what the Government are doing to ensure the quality of umbrella companies. With scamming and fleecing active in this area, amplified by the rules on recovering tax, a step change is required. Many more people are looking to umbrella companies to sort out their compliance and IR35 issues, as others have said. It is easy to find the adverts. This morning, I found an umbrella company promising compliance solutions, keeping the same Ltd status and income, and carrying an ERA certification mark. Can it be trusted? Is it right to rely on a private certification organisation anyway? Do the Government endorse that and should there not be more regulatory protection around umbrella companies? They are clearly responsible for the creation of the leaky hose that the noble Lord, Lord Balfe, described.

HMRC has looked only at tax and NI contributions, not at rights, responsibilities, risks or benefits. It rejected a new kind of body, as suggested in the Taylor review, but then created one by carving out an “employee just for tax purposes” that brings manifest unfairness to the individual and condones undermining employment protections. The HMRC approach also seems to miss the whole picture about risk management and particularly how smaller and new businesses get started and grow. They will be caught before they even have lift-off.

Determinations focus on tests, such as the red herring of mutuality of obligation, which is a description—effectively, a definition—that can apply to any contract, whether of employment or not. That is a fact even admitted in HMRC’s Employment Status Manual. What else does the contract do other than define your mutual obligations to one another, whatever it is about? Other tests such as substitution and not relying on the skill of a particular individual fly in the face of how businesses and reputations are established in the professional field, and certainly discriminate against microbusinesses, start-ups and sole traders.

I am not sure how some businesses are supposed to get started with this hanging over them. I founded my own business from scratch and operated it for 30 years, but this would have stopped me in my tracks, because I started as a sole trader and, believe it or not, on day one or day 10, or in month three, you might get your first client—and whoops! Oh dear, you are an employee.

Other tests are equally absurd. I can see many reasons why things that are prohibited will become desirable. Of course you want a timetable of when you will function, because you want to know when you can offer services to other potential clients you might raise or because you have other matters you want to attend to. But if you have a fixed timetable, they say you are dancing to an employer’s tune. In the real world, there can be other reasons for wanting a more generalised contract. How many of your Lordships have wrestled with some of the rather difficult and complex purchase order systems of many large companies, which make it difficult to keep having a new one for every new project, as HMRC now suggests should be the case? It is much easier and less time-wasting to have an overarching contract that, yes, flexes as you need it to.

I am not surprised by the number of 20% that do not get a decision under CEST, but given HMRC’s track record, I have no confidence that an enlightened and sensitive approach will be taken. Indeed, I would not even be surprised if bonuses were paid for allocating a business to employee status and upping returns. In fact, will the Minister find out the true situation on bonuses paid to those who are dealing with allocations and let me know in writing? I recall being given some very wrong answers about this kind of thing and bonuses given by HMRC when we were discussing the loan charge. Given where we are at, as I said, my greatest concerns are for small and developing businesses, which are given new responsibilities to sort out status and yet are the most likely to be in uncertain, developing and changing positions, having fewer resources and where these tests about timing, location and substitution really do not work.

As a final point, will the Minister explain what work has been done on providing exemptions for microbusinesses and start-ups, so as not to apply tests that are inappropriate and clearly discriminatory to the circumstances? For example, could there be a three-year period of consideration before any assessment and determination starts, or exemptions for small turnover that rules out looking at a building-up phase?

Overall, I still consider the Taylor review proposals better, not least as the Government have not avoided the creation of a different body—no matter that it is hybrid and, unfairly, for tax purposes only.