Off-Payroll Working (Economic Affairs Committee Report)

Lord Tunnicliffe Excerpts

Wednesday 27th April 2022 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I first join in the congratulations for the noble Lord, Lord Bridges of Headley, and the rest of the Finance Bill Sub-Committee on their work in this area.

I am surprised at the extent to which I have been impacted by this debate. I knew peripherally that this was a bag of worms; this debate has brought out what an enormous bag of worms it is. The noble Lord, Lord Bridges, criticised CEST and illegal or dodgy umbrella companies. I found myself agreeing with the noble Baroness, Lady Noakes—I get very worried when that happens, but she is absolutely right. She talked about the Taylor report and this conflict between tax and rights, and the word fairness came through. “Fair” is an incredibly complex issue, and the phrase I took from her speech was “no coherent principle”. That is the issue; you just cannot do it from one point of view.

The noble Lord, Lord Desai, brought in this concept of uncertainty and the issue of start-ups. The noble Lord, Lord Balfe, said that the whole point is that this has to be root and branch and that it is a big challenge. The words I come back to are that it needs an holistic approach. I will say very little more about the debate, but I somehow pray that this issue will not be allowed to go away. Until it is tackled on an holistic basis, it will generate its own industries, there will be lots of people from all sides making it more and more complicated and there will be more and more laws to patch up little points here and there. Any Government, whatever their general political persuasions, should really be addressing this issue and getting back to that lovely idea of trying to see a coherent principle.

Through the sub-committee’s 2020 report and the subsequent February 2022 correspondence with the Treasury, it has held the Government’s feet to the fire. It was clearly right to raise the concerns it did. The trends we are seeing with off-payroll working very much reflect the sub-committee’s warnings.

When the so-called IR35 system was established under the last Labour Government, it was with the intention of ensuring greater fairness in the tax system. It could not have failed more, could it? I think that was not a political failure but a failure to grasp the complexity of it. There had been a steady increase in the number of employees managing to become contractors and enjoying significant tax benefits as a result. As others have observed, the system was designed to identify so-called disguised employees. These individuals may have been working under the same conditions as an employee but avoided certain tax liabilities by entering a contract through an intermediary, such as a personal service company.

For many years, the IR35 determination was made by the contractor themselves. Such a determination is based on several factors and can be complicated, inevitably leading to incorrect decisions. The sub-committee flagged in its original report that the Government’s own “check employment status for tax” tool may not be fit for purpose. Listening to the debate, clearly it is not. As we have heard, the burden for determining whether IR35 rules apply has gradually shifted from the contractor to the fee payer. This occurred first in the public sector, and those reforms have since been extended to the private sector.

The Government were right to delay the extension by a year, citing the pandemic. We endorsed that decision, as to delay gave businesses and individuals more time to adjust in an already uncertain world. However, in truth, the extra year was already desirable, or even necessary, before the pandemic struck. As the sub-committee noted, there was early evidence that the 2017 public sector reforms were not working as intended. I believe we have now reached a total of five Whitehall departments that have admitted incorrectly classifying contractors. These departments—Work and Pensions, Home Office, Health, Justice, and Environment, Food and Rural Affairs—have had to compensate HMRC for their oversights to the tune of around £250 million.

Part of the problem seems to be the use of blanket declarations, which is a topic covered by the sub-committee, but other forces may have been at play too. For example, it may reflect the simple fact that IR35 has become too complicated. If Whitehall departments cannot correctly apply the rules, what hope is there for others?

Earlier this year, the broadcaster Adrian Chiles won a long-standing legal dispute with HMRC. The authority believed that the IR35 rule should apply to his work for the BBC and ITV between 2012 and 2017, but the tribunal disagreed. What assessment have the Government made of that ruling? Can the Minister comment on how much was spent pursuing the case, given that it ran over several years?

Taken collectively, these events raise the question asked by an increasing number of commentators in the light of the rapidly changing nature of the UK employment market: does the IR35 system continue to serve its original purpose?

Other questions raised by the sub-committee, including how to counter the potential misuse of umbrella companies, are by no means new either. There are genuine fears around the exploitation of workers, particularly those on low incomes, as people seek to avoid tax through rogue umbrella companies and, indeed, former employers seek to avoid tax by forcing low-paid workers into these unsatisfactory conditions. Addressing these questions is therefore increasingly urgent. The sub-committee has pointed to a variety of other possible risks and the Government have at least acknowledged the need to understand them better. In her response to February’s correspondence, Lucy Frazer outlined several workstreams which are under way, as well as committing to ensuring that they are conducted expeditiously.

To be fair to the Government, not all the concerns raised in the report and during this afternoon’s debate could have been addressed during the 12-month delay from April 2020. However, should not some of this work have been under way well before that decision was taken? IR35 rules came into force in 2000. Our economy clearly functions very differently in 2022. While the tax system has seen some changes, it has not kept pace with the developments and trends in the employment market. It seems that there is consensus around the need for modernisation and simplification and the problem appears to be with the political will to deliver.

Of course we must consider this topic in the context of the Government’s continued failure on the Taylor review of modern working practices. As others have noted, employment status for tax purposes and status under employment law have long been separated. The Taylor review made some important recommendations in this area. They include the creation of a special category for those who are neither employees nor genuinely self-employed. These people pay taxes as if they are employees but lack many of the basic employment rights enjoyed by others. It cannot be right for certain workers, often those operating in the gig economy, to remain what the sub-committee labelled zero-rights employees. In some instances the courts have acted to grant new rights to such workers. However, as a rule it should be for the Executive rather than the judiciary to confer adequate protections.

Workers’ rights were prioritised in the Conservative Party manifesto, but the Government seem to have forgotten their promises since the election. Addressing some of the loopholes identified by the sub-committee will improve the situation, but so too would bringing forward the long-promised employment Bill. This question may not directly relate to IR35 but, had the Government legislated to improve employment rights, would we have witnessed the recent P&O ferry situation? We await Her Majesty’s most gracious Speech in a couple of weeks’ time, but if reports are to be believed it will not contain anything on tax reform or employment protections.

The Government want us to believe that everything is under control. However, that is clearly not the case if they are repeatedly unable to deal with pressing issues such as these. We await the findings of HMRC’s research but what we really need is a joined-up approach. We must look at these issues in the round and then, crucially, bring forward that long-awaited legislative package. The sub-committee has called for an off-payroll working regime which is simpler, fairer, more straight- forward, properly enforceable and provides greater certainty to all involved. Which one of these wishes can the Government possibly disagree with and what exactly is the hold-up when it comes to achieving that?