Off-Payroll Working (Economic Affairs Committee Report)

Lord Bridges of Headley Excerpts

Wednesday 27th April 2022 Grand Committee

Moved by

[Lord Bridges of Headley]

That the Grand Committee takes note of the Report from the Economic Affairs Committee Off-payroll working: treating people fairly (1st Report, Session 2019–21, HL Paper 50).

[Lord Bridges of Headley (Con)]

My Lords, I am delighted to open this debate on the Finance Bill Sub-Committee’s report Off-payroll Working: Treating People Fairly. I will try to be quick because I gather that we are under a bit of time pressure. Before I go any further, I thank my noble friend Lord Forsyth, who was chair of the Sub-Committee when the inquiry took place, our excellent clerk, Tristan Stubbs, and our advisers, Robina Dyall and Sarah Squires, all of whose input was invaluable.

Onlookers might be surprised that we are debating in 2022 a report written in 2020. They may think that its findings have passed their sell-by date but they would be very wrong, for it anticipated many of the problems that might result from extending the IR35 reforms into the private sector. Our committee concluded that the approach to this issue—that is, off-payroll working —should be certain, simple, supportive of growth, administratively straightforward, enforceable and, above all, fair. We found the current approach lacking on all counts.

In light of Covid, the Government wisely delayed extending the rules to the private sector until April 2021, so the committee recommended that the Government use that time to rethink their approach, learn lessons from the public sector’s rollout and address issues that our inquiry unearthed. At the end of last year, we conducted another inquiry into the implementation of the rules, and we wrote to the Financial Secretary with our conclusions, to which she replied. I thank her, her predecessor Jesse Norman, and the Treasury and HMRC officials for all of their co-operation. Therefore, now is a good time to take stock of our report and letter-writing and see where we stand. I will draw on both the report and the letter that we sent to the Financial Secretary.

My first question is on whether businesses and contractors are finding that the new rules are simple, are administratively straightforward and offer certainty. We flagged problems regarding HMRC’s tool for checking employment status for tax, CEST, in 2020. Last year, we were told that it was still “not fit for purpose” and did not provide accurate results. The CBI said that, although businesses had found CEST helpful, where HMRC guidance and case law diverge, businesses are left in a position of being told that they can rely on an outcome that would likely differ from that which would be handed down by a court. CEST cannot and should not be a substitute for law. Although it cannot be expected to cater to every scenario, a 20% undetermined rate means that a significant number of people need additional support to identify their status. This support must be improved.

Furthermore, the continued absence of questions on mutuality of obligation within CEST means that many people affected by the off-payroll rules do not have confidence in the accuracy of the results. Only today, we see the lack of clarity on this point highlighted by another current case between HMRC and Atholl House. This uncertainty has contributed to unfair employment practices, blanket bans and decisions. We heard that 21% of freelancers had reported that their client had simply determined all engagements as inside IR35, a blanket assessment. Although the Financial Secretary said it was legitimate for companies to decide against using contractors working through personal service companies, the committee concluded that it is regrettable if such decisions are driven by tax rather than commercial considerations. Tougher compliance action is needed where engagers are effectively evading their obligations under the rules to make individual determinations.

Then there is the issue of appealing against a state of determination. Research from IPSE showed that more than three-quarters of those who disagreed with their status determination challenged the outcome and, of those, 79% reported no change as a result of the challenge. The National Audit Office has said

“there is not a clear legal route to appeal further. If workers believe they have been taxed incorrectly, their recourse is to use HMRC’s self-assessment and NIC reclaim routes.”

On appeals, HMRC told the Public Accounts Committee:

“If everyone co-operates and there are no challenges, it will take a few months. If it is complex and there are multiple reports, it can take years”—


years, my Lords.

So, in response to my first question, this system is not simple, not easy to administer and does not offer certainty. Let me ask a second question: are these changes supporting growth? Here, I freely admit, it is difficult to disentangle the impact of Covid, Brexit and other macro events. But in the words of one of our witnesses, the UK’s reputation as

“an easy place to start up”

businesses has been replaced by a “huge compliance burden” and a “punitive tax regime”. That is why research into the impact of the measures must consider changes in the UK’s labour market and the broader economy. The committee said that the scope of this research should be more comprehensive and invite input from affected contractors as well as engagers and intermediaries.

Specifically, the actual cost of these changes on business is still unclear. HMRC estimated the one-off administrative cost incurred by business in preparing to operate the off-payroll rules would be £14.4 million, with a negligible ongoing impact. The committee challenged this estimate, as witnesses judged it to be too low. HMRC revisited its estimates and increased that one-off cost to £19.7 million, with an ongoing net saving of £0.3 million. The CBI told us that that £19 million is still an underestimate, and the NAO agreed that HMRC might have underestimated the cost to employers. So, to answer my second question, there is no evidence that this change is supporting growth.

I turn to the question of whether these changes are making the system fairer and whether they are enforceable. For contractors assessed as within the off-payroll rules by an engager, we were told there is likely to be a financial cost, given the difference in employee tax and NIC treatment compared to contractors. We were told that a key issue is employer NICs: how the cost of contributions is allocated between the engager and the contractor.

The CBI and the Federation of Small Businesses explained that people in the more skilled end of the market are more able to ensure costs are paid by the engager. However, for the lower skilled end of the market, it seems many engagers are passing costs on to contractors via reduced rates of pay. It is these lower paid contractors who are falling into the clutches of so-called rogue umbrella companies. In our 2020 report, we warned of the risks presented by umbrella companies and the likelihood that their use would increase when off-payroll rules were extended to the private sector. Look at what has happened: HMRC estimated that 100,000 individuals were working through umbrella companies in 2007-08, but that by 2020-21 this had increased fivefold to at least 500,000. External commentators estimated the figure to be 600,000.

No doubt some of these umbrella companies perform a useful function, but the committee was told there is

“very clear evidence that it”—

IR35—

“has driven up tax avoidance.”

Here lies the tragedy and irony of this sorry saga. This whole policy was meant to tackle tax avoidance, yet it seems that it is giving birth to a new cottage industry of tax avoidance.

I have not the time to go into the measures that HMRC is taking to tackle rogue umbrella companies, but the sub-committee was obviously concerned and remains concerned about this and that the off-payroll rules are encouraging the insertion of unnecessary intermediaries into the supply chain, increasing the opportunities for rogue operators. A nagging question is whether HMRC is focused too much on non-compliant contractors and not enough on individuals and others who set up these rogue companies, often offshore. That is why the committee has said that the Government should commit to a date for introducing legislation to create the proposed single enforcement body to regulate umbrella companies.

As I am conscious of time, I shall end with a final question: are these changes, and the entire IR35 edifice, achieving their overall aims and objectives? It was said that these changes would protect the tax base. HMRC assessed that the loss of tax from non-compliance with IR35 could cost £1.3 billion. It now states that improved compliance raises much more—£4.1 billion in 2024-25—so it appears that revenue raising, not simply protecting the tax base, has become the main driver of changes.

The second objective is the word in the title of our report—fairness. Everyone doing the same job should pay the same tax. We agreed with this in principle, but the assessment of what is fair cannot be restricted to just tax; it must also apply to rights. It is unfair to tax individuals as employees while denying them the rights of employees. That is why we recommended that the Government take forward proposals set out in the Taylor review, which considered tax, rights and risk together. Failure to address these issues in the round has created the muddle we are in today. Listen to what the Office of Tax Simplification said way back in 2015. It said that

“the tax system is still in many ways stuck in an out-of-date mindset: of categorising workers as either employees, firmly on the payroll, or self-employed … This made sense in the 1950s and 1960s but the huge growth in freelancing as a way of life (and work) doesn’t fit readily into this traditional model.”

The need to properly define employment rights for the purposes of both tax and employment is now ever more urgent. Two years on, nothing has been done about this. We are told that the Government will set out more detail in due course—Whitehall speak for “we don’t know when”. The report’s title was Treating People Fairly. For a Government who want to level up, they are doing the reverse. They are perpetuating a system that is uncompetitive, complex, burdensome and, above all, unfair. Fundamental change is needed. I beg to move.

--- Later in debate ---

[Lord Bridges of Headley (Con)]

My Lords, I thank my noble friend for that response. Indeed, I thank everyone—this little band of us—who has debated this topic. It is rather appropriate that we are meeting in the Moses Room, because I somehow feel that IR35 has become a tablet of stone for the Treasury and HMRC. I fully accept what my noble friend says: there are some sort of scratchings or graffiti on the tablet of stone that have made alterations here and there, but it essentially says that we must not change IR35 in a profound way.

The problem that my noble friend grappled with—I was not expecting her to announce grand changes in tonight’s debate—is that, as all of us have outlined, the underlying unfairness of this system remains. Let me remind everyone of what the committee concluded:

“It is unfair that contractors within the rules are treated as employees for tax purposes but do not qualify for employment rights, thus creating a class of ‘zero-rights employees’. The Government is replacing one unfairness with another.”


That is the fundamental truth that we have to confront and why we have to see change. I fully accept that aspects of the Taylor review are being implemented but that is not enough, and we have to grip this. Indeed, it is even more important that we grip this post Covid because of the need to have a flexible workforce.

I do not want to delay everyone with lots of changes but to make just two points. The noble Lord, Lord Tunnicliffe—he is my noble friend tonight, because we agree on this—said that this policy could not have failed more. I was really struck by that; it is a very interesting point. I accept that the Government made changes to IR35 before implementing it in the private sector, in light of what we saw in the public sector, but let us just understand what has happened in the public sector.

The noble Lord, Lord Tunnicliffe, mentioned the figure of £263 million. That is the amount owed or expected to be owed by government departments for failing to administer the reforms correctly. That is an eye-watering amount of money. What do we already know? HMRC told the Public Accounts Committee in the other place that key personnel in those departments did not understand the contractual framework they were operating in and how they were engaged as the contractor in the labour market. The NAO found that half of all respondents found the reforms difficult to comply with. It also found that

“public bodies have reported incurring additional costs … and challenges in recruiting or retaining contractors … Public bodies we interviewed explained that they had dedicated a lot of ongoing resource to employment status determinations, such as full-time staff, supporting teams and review panels.”

This is a problem we are already seeing in the public sector, and we are now beginning to see what it is meaning for the private sector. I am delighted that my noble friend says there will be research on this, because it is well overdue. I make just one point. Computer Weekly showed that the number of self-employed is falling fast. It has gone from 130,000, or thereabouts, in 2016-17 to 97,000 in 2020-2021. The impact on the nature and shape of our workforce is quite profound, so we need that research and we need it fast.

As my noble friend Lady Noakes and others pointed out, this is having a real impact not just on professions at the high end of the workforce, the more skilled, but on those who are on low pay, the people who are being hit really hard right now by the cost of living. I very much hope that we will learn those lessons and that the Government will publish that research very quickly. Most of all, I live in hope that something might come along soon—if not in the Queen’s Speech, soon thereafter—that will address this fundamental unfairness that must be gripped quickly. I thank noble Lords for taking part in the debate.

Motion agreed.