Call to revise ‘flawed’ IR35 scheme

The new IR35 tax scheme is deeply flawed” and has “opened the door to rogue providers and the mis-selling of tax avoidance schemes,” according to members of a parliamentary committee.

Changes to off-payroll rules to limit tax avoidance, known as IR35, should be revised, according to members of the loan charge all-party parliamentary group (APPG).

The MPs and peers say the move has ‘muddied the waters on the definition of contracting,’ and says tax and employment status should be aligned, as experts warn firms need to be diligent about using umbrella companies.

It has called on the government to rethink changes to the off-payroll rules introduced in the private sector earlier this month, arguing that tax status and employment status should be brought into line.

It also warned that being able to classify contractors as employees for tax purposes without providing the same rights as an employee creates uncertainty for businesses, which could result in “damaging and unintended consequences”.

The report said not only had IR35 failed to prevent tax avoidance by individuals falsely claiming to be self-employed, but it had also “ironically muddied the waters and unintentionally made it harder, not easier, to define contracting”.

IR35 was first introduced in 2000 to ensure people who were working like an employee, but through their own limited company, paid broadly the same tax as someone employed directly.

Previously, contractors providing services for organisations outside the public sector were responsible for deciding their employment status for tax purposes.

However, after being pushed back a year because of the coronavirus pandemic, the new off-payroll working rules finally came into force in the private sector this month, shifting the onus for who is caught by the tax rule from the contractor on to their employing organisation.

The change, which has been in place in the public sector since 2017, is designed to tackle employer non-compliance with the rule, which the government says is estimated to cost the Exchequer £1.3bn a year by 2023-24.

The APPG called for these changes to be amended in this year’s finance bill to ensure workers who are caught ‘inside’ IR35, and therefore taxed like an employee, would also be given holiday pay, sick pay and other employee benefits. 

The report also warned that the new IR35 rules could see many contractors in the private sector forced to work under umbrella companies, which the APPG said were often unregulated and left contractors vulnerable to hidden costs or mis-sold tax avoidance schemes.

Baroness Susan Kramer, a Liberal Democrat peer and vice-chair of the loan charge APPG, described IR35 as “deeply flawed” and said it had “opened the door to rogue providers and the mis-selling of tax avoidance schemes.

“The forthcoming finance bill [should] scrap or at least amend the off-payroll rules to tackle bad practice in the supply chain and to ensure that anyone who is taxed as an employee receives genuine employee rights and benefits,” she said.

“We also call on the government to announce the review into self-employment that they promised, so that, rather than constantly penalising contract and freelance workers, we move to a proper system of recognition and structuring of this important way of working, which is increasingly commonplace and important to the economy.”

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