Off-Payroll Working (Economic Affairs Committee Report)

Baroness Penn Excerpts

Wednesday 27th April 2022 Grand Committee

[Baroness Penn (Con)]

My Lords, I thank my noble friend Lord Bridges for securing this debate. He is right that it remains a timely debate, because of the recent extension of IR35 to the private sector, which was delayed by a year due to Covid, and with the update provided by the Finance Bill Sub-Committee in its letter to the Financial Secretary, and because, as I will touch on and as has been touched on in the debate, there are live issues with regard to the implementation of IR35. The Government are committed to continuing to learn lessons as we press ahead with its implementation. This matter is not closed but one where we want to continue to learn and improve on how we do things.

The Committee has also shown clearly that there are a number of issues for the Government to consider. There has been a remarkable amount of consensus on that from this debate. The noble Lord, Lord Tunnicliffe, should not be so worried about agreeing with my noble friend Lady Noakes. I may not like it, but she can often be right.

Let me also thank the Finance Bill Sub-Committee for the time it has taken in making its careful analysis of this important policy area, both in 2020 and in its more recent follow-up inquiry.

I am grateful to noble Lords in this select group today for their well-considered points. Noble Lords are right that the issues we are debating are key for workers and businesses, and of course to the UK’s financial health. Before I respond to specific points raised in the debate, it is perhaps worth taking a step back to remind noble Lords of the reasoning behind the introduction of the off-payroll working rules.

As I am sure noble Lords are aware, these rules have been in place for over 20 years. Ultimately, they aim to ensure that people working like employees but through their own limited company are taxed like employees. Initially, it was for workers to decide whether they were working like an employee and in scope of the rules. However, it became clear over time that individual workers were often not best placed to properly assess their own employment status; as a result, there was widespread non-compliance. HMRC estimated that only one in 10 people who should have been paying tax under the off-payroll working rules were paying the right amount, prior to the reforms. In fact, non-compliance was forecast to have cost £430 million in 2015-16.

As a result, the Government brought forward legislation to change who made the decision on whether a worker met the rules and should pay tax like an employee. The reform shifts the responsibility for determining employment status and ensuring the right tax is paid to HMRC from the individual’s intermediary to the client, which could be a business or a public sector body. The Government started by implementing these reforms with regard to the public sector in 2017, and then, following significant engagement, extended them last year to medium and large organisations in the private and voluntary sectors, where non-compliance had been forecast to reach £1.3 billion per year by 2023-24 if it had not been addressed.

I stress that these changes simply ensure that the rules that have been in place for the last 20 years are actually followed—and that two people who are doing similar jobs, but through different structures, are not paying very different amounts of tax. It is about ensuring fairness and protecting the tax base. It is not about revenue raising, as has been implied at points in this debate. This is not to ignore the wider points—which I will come on to—about the status of employment with regard to tax and rights, which are two different systems, as all noble Lords have noted. This question has been considered by the Government over some years.

The Government have not changed the way in which the genuinely self-employed are taxed. If someone is running their own business through their own company, these rules will not apply to them. The reform does not create a new tax on contractors or change the principles of tax status in any way. It simply moves responsibility for determining employment status to the party in the labour supply chain that is best placed to take it on: employers who already make these assessments for their regular staff on a routine basis.

So far, the evidence suggests that the reform is successfully achieving its primary objective: to ensure fairness and improve compliance with existing rules. As a consequence, it has resulted in additional tax revenue of £250 million in 2017-18 and £275 million in 2018-19—money that has helped to fund vital public services, as noted by my noble friend Lord Balfe. It is therefore heartening that the Finance Bill Sub-Committee acknowledges that these reforms are helping to reduce non-compliance.

However, I recognise that the sub-committee raised further issues. As noble Lords will be aware, last month the Government set out a comprehensive response to the sub-committee’s conclusions and recommendations in its follow-up inquiry into the off-payroll working rules. In that response, we first set out how our engagement work with taxpayers, businesses, agencies and other organisations has been at the heart of our approach to this reform. Indeed, before extending the reform to the private and voluntary sectors, the Government carried out two consultations in 2018 and 2019. We listened closely to stakeholders’ feedback on how the legislation was working and introduced changes that provided more certainty to parties in the supply chain. To answer the point from the noble Baroness, Lady Bowles, about an exemption for micro-businesses or start-ups, we decided not to include 1.5 million small businesses in the reform’s scope. The Government also carried out a further review of the off-payroll working rules in 2020 and have acted on stakeholder feedback by expanding the consequences for those who provide fraudulent information and introducing anti-avoidance provisions.

The sub-committee welcomed the fact that HMRC has learned some lessons from the public sector reform when rolling it out into the private sector. This additional insight has led to a range of important improvements, including adapting HMRC’s education and support to better suit the needs of specific stakeholders and customers. When the rollout of the reform to the private sector was delayed by a year due to Covid-19, we put this extra time to good use by expanding the support offered to taxpayers, businesses and other organisations to help them prepare, and this has continued since the reform’s implementation last year.

The noble Lord, Lord Tunnicliffe, made several points about the implementation in the public sector. He talked about the use of blanket declarations being the most significant reason why the public sector got its determinations wrong. The most common error that HMRC identified through its compliance work with public bodies was the understanding of the impacts of substitution clauses in their contracts. HMRC has worked with the Tax Centre of Excellence to improve understanding in this area. HMRC has not seen any evidence of the widespread use of blanket determinations, which is supported by its internal data and external research. In fact, HMRC compliance activity has found that many public bodies did take reasonable care when implementing the rules. None the less, many lessons have been learned from the 2017 reforms, as I have noted, feeding into the approach that we took in the expansion in 2021.

Another issue raised was the Check Employment Status for Tax tool, CEST. HMRC has spent £1.1 million enhancing that tool to help employers, workers and agencies determine their tax status, following feedback. On the point raised by my noble friend Lord Bridges about a tension between case law and the CEST tool, the tool was rigorously tested against known case law and settled cases and is the only status determination tool for which HMRC will stand by the result produced, provided the information inputted is accurate and the tool is used in accordance with the published guidance. However, while we believe we have responded to some of these points, as I said to noble Lords, monitoring the impact of the reforms is still very much a priority for the Government. We have commissioned external research into the 2021 reform that will gather further information on the effects of the reform on the way contractors are engaged, rates of pay for contractors, challenges with implementing the rules and the effectiveness of HMRC’s support and guidance.

Noble Lords asked whether this research would take into account the changing post-Covid labour market. Indeed, it does ask for information on the reasons for any changes in the use of contractors since March 2021, including Covid. In addition, insights from our evaluation of the 2017 reforms show that the impact is broadly in line with HMRC’s expectations so far.

Almost all noble Lords in the debate raised the issue of umbrella companies. We have seen some evidence since 2017 of some contractors changing the way they provide services, moving to the use of other structures. As noble Lords noted, some clients and contractors will reasonably take the view that direct employment on the payroll of the client, an employment agency or an umbrella company is preferable to having contractors work through their own limited companies. This is expected and perfectly acceptable. None the less, we recognise the concerns about the scope for non-compliance in the umbrella company sector. As my noble friend noted, there is no problem where an individual is working with an umbrella company that is compliant with the rules; it simply means that the right tax is being paid and that the individual may be receiving the benefits that come with employment. But we have published guidance for those working for and with umbrella companies and have also recently completed a call for evidence on the umbrella company market. We are analysing the responses to that call for evidence and, at risk of aggravating my noble friend, the Government will respond publicly in due course.

At the same time, the Government are focused on tackling the promotors of tax avoidance schemes. Indeed, we introduced a tough new package of measures at the Autumn Budget which came into force in February this year. These included new powers for HMRC to freeze promoters’ assets, so they pay what they owe; steps to deter offshore promoters; and legislation allowing HMRC to shut companies and partnerships that promote these dubious schemes.

I am conscious of time. I think the main point of substance that all noble Lords touched on is the difference between employment status for rights and employment status for tax. Noble Lords are correct: those systems are separate. However, officials across HMRC, the Treasury and BEIS work closely to ensure joined-up thinking on common issues. It is worth emphasising that the current employment status frameworks for both tax and rights work for the majority of individuals and businesses. However, we recognise concerns about employment status, and we are considering options to improve clarity, making it easier for individuals and businesses to understand which rights apply to them. We are working externally and across government on how best to address this in a post-Covid scenario.

The work of the Taylor review is an example of the Government considering this question, and while we are progressing on a number of aspects of that review, it is important not to forget that we have already implemented a wide range of its recommendations. We have delivered non-legislative commitments such as launching a holiday pay awareness campaign. We have passed a raft of secondary legislation to boost workers’ rights and deliver the Taylor review recommendations, including by extending the right to a written statement of core terms of employment to all workers and introducing a right for agency workers to receive a key information document when signing with an employment business. I would say that it is right that we do not change the employment law framework until we are sure that any changes will address the needs of businesses and workers in the post-Covid economy. In the meantime, we will continue to take the necessary action to support businesses and protect jobs.

The noble Lord, Lord Tunnicliffe, asked me a specific question about the ruling in the case of Adrian Chiles. While I cannot provide information on specific cases because of taxpayer confidentiality, I should answer his broader point. HMRC has disputed a number of cases regarding television and radio presenters in the courts. Just yesterday, it won two cases in the Court of Appeal, setting down useful principles in such cases. Since April 2019, HMRC has won more than 80% of cases in litigation. Where no other route to resolving issues is possible, it is right that some cases are decided in the courts. In terms of the wider approach, I hope that would be the last place that we want to end up, even though it is necessary in some cases. The noble Baroness, Lady Bowles, asked me a question about bonuses, which I am happy to write to her on—and, indeed, if there any other points that I have not managed to cover.

I reiterate my thanks to all those who have contributed to this debate. I end by emphasising that our changes to the off-payroll working rules have been made with the aim of improving compliance with existing rules and increasing fairness in the tax system. As a consequence, these changes have brought in additional revenue to fund vital public services. However, I reassure noble Lords that we are not complacent. Our approach to these reforms is a collaborative one. Therefore, we look forward to very much continuing the conversation with those affected by these changes, so that we can work together to build a tax system in which everyone pays their fair share.