close
Share with your friends

The House of Lords reports on IR35 reform – which way now?

The House of Lords reports on IR35 reform

The House of Lords calls for a fundamental rethink of IR35 reform, whilst the Government plans to implement its current proposals from 6 April 2021.

1000

Also on home.kpmg

The House of Lords report on IR35 reform calls for a fundamental rethink of the Government’s approach. It also recommends that the Government revisits the Taylor Review’s recommendations, and reviews what ‘employment’ should mean for both tax and employment law purposes in light of modern working practices. However, the Government currently remains committed to implementing its proposed off-payroll working reforms from 6 April 2021. Affected businesses and public sector organisations should therefore continue with their IR35 planning on this basis.

The House of Lords Economic Affairs Committee published its report into the Government’s proposed IR35 reforms, Off-payroll working: treating people fairly, on 27 April 2020.

The report supports the deferral, in light of the COVID-19 outbreak, of the proposed off-payroll working reforms until April 2021. However, it is also critical of the underlying off-payroll working rules, and calls on the Government to ‘rethink fundamentally’ its approach to reform.

In particular, the report highlights additional complexity and costs associated with the current proposals, the risk of unforeseen behavioural responses, and the potential for an adverse impact on the labour market.

Time to revisit the Taylor Review?
The report sets out alternatives, put forward to the Committee, to the Government’s approach to off-payroll working. These include:

  • A flat rate withholding tax on payments to contractors (similar to the Construction Industry Scheme);
  • Imposing a levy, similar in operation to employer’s NIC, on expenditure on contingent labour;
  • Aligning the NIC regime for the self-employed with that of employees; and
  • Introducing a statutory employment test to give more certainty on employment status.

The Committee considered that, once fully developed, a number of these alternatives could be less onerous and preferable to both the current and reformed off-payroll working rules. However, it concluded that the best long term approach is for the Government to consider employment tax, rights and risk holistically, and revisit implementation of the Taylor Review’s proposals.

We agree with recommendations (see our earlier comments on the Government’s response to the Taylor Review and subsequent employment status consultation), in that key underlying issues on how we tax labour in the 21st century remain unresolved. This is particularly so at a time when the nature of work in the gig economy makes it increasingly difficult to distinguish between employment and self-employment.

What happens now?
The withdrawal of a Budget resolution containing the draft IR35 legislation on 27 April 2020 prompted some speculation that the reforms might be reconsidered in light of the Lords’ report. However, later that day, Jesse Norman (the Financial Secretary to the Treasury) confirmed the Government’s intention to introduce an amendment to the Finance Bill providing for a new commencement date of 6 April 2021.

As recommended in the House of Lords report, the Government will commission independent research into the long term effect of 2017’s public sector IR35 reforms. This should be available before the presently proposed reforms come into effect next year. However, it is unclear at this stage whether, and if so how, that research might influence implementation of these reforms.

Large and medium sized private sector organisations, as well as public sector organisations, should therefore continue to plan for implementation of new IR35 regime with effect from April 2021.

Insight and guidance on getting ready for the IR35 changes is available on KPMG’s Employers’ Club, and our dedicated off-payroll working pages.

For further information please contact:

© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal