I beg to move,
That this House has considered IR35 tax reforms.
It is a pleasure to serve under your chairship, Mr Gapes. We are now a year out from the Government’s extension of the IR35 rules to the private sector, and we are halfway through the Treasury’s further technical consultation, which is due to conclude on 28 May. Although the IR35 reforms are a complicated issue, I hope that this debate will provide an opportunity for us to add something to the process, raise the concerns of constituents who will be affected by the changes, and flag up to the Minister our anxieties about the IR35 roll-out into the private sector.
The rules have been a long time in the making. It was in the late 1990s that concerns began to creep across Whitehall that private service companies were becoming a widely utilised tool to disguise worker status, allowing some workers to perform the role of an employee while they and the employer reaped the tax benefits of a business-to-business relationship. We all want to tackle non-compliance and tax avoidance and close any loophole that allows an employee to leave their employment on a Friday and return to the same role in the same office on the Monday as a contractor or consultant through a PSC, paying less tax. The question, however, is how it is being tackled and what impact it will have on legitimate small businesses and the clients who engage them.
The last Labour Government introduced provisions to allow the tax authorities to take a closer look at contractual relationships to identify where an intermediary, such as a PSC, may be being used to avoid tax contributions and associated workers’ rights. That legislation, known as IR35, was introduced in 2000 following the March 1999 Budget statement. It was a controversial measure at the time, and calls to scrap it came from different parties. However, although the initial implementation created problems that still bedevil the modern IR35 rules, the legislation took important steps to avoid a contraction of the tax base as self-employment increased across the UK labour market and to ensure that where individuals acted as employees, they were treated as such.
In many ways, the objectives of the original IR35 rules were significantly ahead of their time. The growth of self-employment in the UK economy has produced several structural problems, with employment status and the gig economy leading to situations in which employers can privatise the reward of lower-cost labour through tax avoidance, but socialise the risk that comes from cutting corners, with the costs borne inevitably by the public purse.
The Select Committee on Scottish Affairs, on which I sit, has looked closely at the impact that unclear worker status can have on the wider economy. Our inquiry considered the findings of the Taylor review and supported its conclusion that there is an “overwhelming case” to tackle the lack of clarity around employment status. We also supported its recommendation that the Government should produce
“a clearer outline of the tests for employment status, setting out the key principles in primary legislation”.
Perhaps at the moment the Government lack the necessary bandwidth and political capital to follow through fully on the review’s recommendations, but that is ultimately where we must end up.
One of the major issues with the IR35 changes is the great difficulty in assessing whether an individual should be caught by the rules. Her Majesty’s Revenue and Customs’ guidance and tools are far from 100% effective, and there is a lot of complex case law. I would therefore be grateful if the Minister said what progress the Government have made on the issue and on the Taylor review’s recommendations.
It is impossible to look at the myriad changes that the labour market is likely to go through in the coming decades and not conclude that legal clarifications will need a serious rethink, particularly to secure the integrity of the tax base that will be all too important in an ageing society. In many ways, the IR35 rules are a stopgap in the journey towards a statute book that supports 21st-century employment practices and the realities of modern workers’ lives. I have no doubt that the objective of the reforms is correct, but their implementation threatens to scupper any associated benefits.
The roll-out of the IR35 rules in the public sector has raised several concerns that need to be ironed out. Independent research has highlighted problems in implementing the reforms, including initial unfamiliarity with the legislation and guidance, which has resulted in compliance problems. Many public authorities were found to be overly cautious or to have judged more contractors to fall within the rules than they should have.
The incentive, of course, is on the fee payer to take a cautious approach rather than leave themselves potentially vulnerable to future tax liabilities. If there are agencies in the contractual chain, it is the agency immediately above the PSC in the chain that becomes the fee payer and is therefore responsible for the liability of an incorrect status decision, so an agency is unlikely to dispute a decision that brings the contractor within IR35 even when it should not be. I know that the Government are exploring options for the consequences for businesses that fail to use reasonable care in making a decision. Will the Minister update us on progress in that area?
Concerns have also been raised about the reforms’ impact on the ability of public authorities to recruit contractors in sufficient numbers and with the required range of skills, as a result of which the rates for off-payroll workers have increased in some areas. Some contractors have been put off working in the public sector at all.
Many of those problems in the public sector have been solved, or at least mitigated, but the private sector presents a very different problem, with significantly greater variation, potentially weaker channels of communication and less room for manoeuvre when things go wrong. That has led a number of membership organisations, including the CBI, to call on the Government to extend the trial period in the public sector and offer extra resources to support the initial roll-out when the private sector is eventually included. The CBI was so concerned that it even went as far as to ask the Government to eliminate the prospect of an early roll-out in 2019.
We are in a state of great uncertainty about our future relationship with the European Union and its likely impact on businesses, the economy and private sector recruitment. I wonder whether the Government will consider delaying the roll-out beyond 2020 if it is deemed necessary. I have received representations from constituents who operate as contractors and have enormous reservations about the extension of these rules, and I am sure other hon. Members have received such representations.
One constituent who came to my surgery set out his concerns about the complexity of the system. He has deep reservations about whether it could be implemented successfully and about the costs when things go wrong. He says:
“I have no idea how clients will assess my work when the responsibility transfers to them, and neither do they”.
He believes there will be widespread non-compliance as clients struggle to make assessments and default to playing it safe. He works in IT, and also has deep fears about where ultimate liability will rest. I know the idea is that the fee payer is responsible, but contractors are looking at recent HMRC decisions about various schemes that were deemed legal when they were set up, which are now leaving individuals with massive retrospective tax bills. There is a worry that poor application of the rules now could end up meaning that individuals face bankruptcy later down the line if they are chased for payment.
My constituent sums up his concerns by wondering if there will be any point in continuing as a contractor at all. Among the reasons, he cites potential problems for processing expenses. In the public sector, we have heard about the removal of the 5% allowable deduction from the income of personal service companies for general expenses incurred in running the business. If all engagements are treated as caught by IR35, all the income accounted for is either tax, national insurance contributions or net pay, so there is nothing to set running costs against.
My constituent also says that the situation could lead to him setting up an umbrella company, which would increase costs. He is seriously concerned about that, as he is about the potential for disproportionate costs to be passed on to the contractor by clients. He says:
“Ultimately, if the benefits are removed from me and I am actually paying more tax than a regular employee, with none of the rights, then I have a difficult choice to make. What will my clients do if they cannot source flexible skills in the contract market due to many others doing the same as me? They have two choices: one is to hire an employee, which defeats the ‘flexibility’ argument. If they cannot hire an employee just for the duration of a project, they will most likely go to a large organisation, such as IBM or Capita who will charge them 2-3 times the contractor day rate.”
My constituent makes the important point that those large companies are much more likely to have sophisticated tax and legal expertise at their disposal than small businesses such as his.
What my constituent says about being treated as an employee for tax purposes while not enjoying the same employment rights is crucial. I know that the Government are aware of that point, and I would be grateful if the Minister would update us on their current thinking. I am sure that the Minister will recognise many of the concerns that my constituent has highlighted, as they reflect much of what has been raised by private sector interest groups and in Government consultations.
As I said before, the aims of the IR35 rules are right, but the prospect of their implementation has fostered a very bleak view indeed. The substance of this implementation must therefore be better, as the rules will be wholly self-defeating if, by their very nature and complexity, they force contractors out of the market or encourage more sophisticated forms of tax avoidance. I am sure all of us here would agree that the aim is to allow flexibility where needed, while ensuring that revenue and rights are not lost where a contractor effectively becomes an employee.
I have asked the Minister for quite a lot of things. When he is summing up, I hope he can provide a further update on the use of the IR35 rules in the public sector, particularly around compliance with the rules, uptake and concerns that companies are exiting the public sector market because of those rules. I hope he will summarise the key lessons the Government have learned from the public sector roll-out and how they are being adjusted to suit the different nature of the private sector. Will he clarify whether the Government have any ambitions or plans to further roll out the IR35 rules to small businesses in the private sector? Will he also give an update on how the IR35 rules sit in the Government’s wider consideration of the recommendations of the Taylor review?
It is a pleasure to serve under your chairmanship, Mr Gapes. As hon. Members may know, I am vice-chair of the all-party parliamentary loan charge group. I was approached by an agency that employs doctors, nurses and healthcare assistants purely for the NHS, because there is an interconnection with the loan charge—the unintended consequences of IR35’s creation are why we have the whole problem with the loan charge.
Loan schemes were set up as a way of enabling people who are self-employed and freelancers not to be disbenefited and not to have to pay more tax than if they had gone through pay-as-you-earn. For many people, it was intended to remove the administrative burden of setting up their own companies. As the debate going on now in the main Chamber will show, many hon. Members from both sides of the House have lots of examples of the many distressing consequences of the way the loan charge has been handled by HMRC, particularly in the last three or four years.
I want to relay the concerns of the managing director, owner and founder of what was a significant recruiter of NHS workers, whose business has declined by more than 60% in recent years. The particular issue he has concerns about—I hope I can express it clearly, and I apologise if I do not get this entirely right—is the confusion in the NHS about whether freelance workers are PAYE or not. There is mixed communication, which is causing him difficulty in his business, but it is also causing difficulties for the workers concerned. These are low-paid, or medium-paid, people—some earn less than £30,000, and most less than £50,000 per annum.
Because of the inflexibility of NHS employment, those people choose to work on a freelance basis, day by day. London-based people could be sent to Southampton one day, Bath the next day and maybe somewhere in London the day after. They incur travel expenses. For long days, they incur costs that they would normally be able to claim against the company. However, if they are PAYE, they cannot claim those costs. They therefore make themselves unavailable to the NHS.
I also learned that this situation is one of the major causes—in addition to Brexit—of chronic shortages of clinicians, medical staff, nurses and nursing assistants in the NHS. For people who need to work flexibly, the work is just not worthwhile when they are being forced to go through PAYE. They are therefore working in the private health sector, where there is more flexibility and the restrictions do not apply, they are leaving the country, or they are leaving health and working in another, more flexible, sector, where they are better off.
I have been told that 99% of the firm’s agency workers are being unlawfully blanket-assessed in IR35 and forced into unlawful employment, without a fair assessment—approved NHS framework operators are enforcing the blanket assessment. NHS Improvement has stated that a fair and individual IR35 assessment must be carried out, but that is not happening; blanket assessments are not compliant with the legislation.
Under the new rules, the fee payer, which is the agency or third party paying the worker’s personal service company, is not allowed to carry out an IR35 status assessment to determine the proper IR35 status of the worker—I apologise for reading this out, but I will get it wrong if I do not. The fee payer is the closest party in the contractual chain to the worker’s personal service company. This is despite HMRC guidance that states that, where a public authority, agency or third party makes a payment to a worker’s intermediary on or after 6 April 2017, it decides if the rules apply and then deducts tax and primary NICs from the payment it makes and pays the employer’s NICs, and that is included in calculating the apprenticeship levy.
The HMRC check employment status for tax tool that is used to assess workers assumes mutuality of obligation, which is one of the main tests that has to be assessed in all engagements via IR35 determination. As a result of the assumption, the CEST tool is flawed. The importance of mutuality of obligation is demonstrated by the recent tribunal case of Dr R Narayan v. Community Based Care Health Ltd—I can make the details available. In the supply of people to NHS trusts, there appears to be no mutuality of obligation. The worker can cancel a shift at any time and will not be paid, which is key to that case. The NHS trust can cancel a shift at any time, and the worker will not be paid, as confirmed in the contracts of the agency I mentioned. However, 99% of the agency workers are blanket-assessed inside IR35 and forced into unlawful employment.
It appears that HMRC does not understand the IR35 rules. Apparently, it recently lost a tax case against Lorraine Kelly. If HMRC has lost approximately 50% of IR35 tax cases that it has brought against contractors, how can it implement an online tool to get a correct IR35 result? HMRC gets that right only 50% of the time when it goes to court, which has to be worrying.
I am very concerned about what I have heard from this agency, which is trying to do the right thing. Incidentally, it warns all its staff about the loan charge. It is an umbrella company but does not use the loan charge. I am absolutely convinced that the company is trying to do the right thing, but it is really concerned about the impact that the confusion between HMRC and the NHS is having on the ability to supply appropriately qualified staff to the NHS, as and when needed.
It is a pleasure to serve under your chairmanship, Mr Gapes, and to follow my hon. Friends the Members for Rutherglen and Hamilton West (Ged Killen) and for Brentford and Isleworth (Ruth Cadbury).
From discussing the issue with constituents, trying to read up on it and coming here today, the thing that really strikes me is how complicated it is. It is clearly complicated for most of us, as well as for the people who have to deal with it on a day-to-day basis. Obviously, nobody likes tax loopholes. My hon. Friend the Member for Rutherglen and Hamilton West gave an example of one that is clearly unethical and wrong. What made me realise more about all this is that a lot of the people who are affected by this want flexible working relationships. They have to respond to peaks and troughs in their businesses, and we need a system that works for them.
My hon. Friend the Member for Rutherglen and Hamilton West brought up concerns about the implementation of IR35 legislation in the public sector, and raised the CBI’s concerns about its implementation in the private sector. He also mentioned the clarification that can be provided by the recommendations of the Taylor review. We would all welcome clarification on this issue. I do not know whether I speak for other hon. Members, but the more I tried to read about it, the more complicated it became.
I want to raise a couple of issues from my constituency, which have been raised by people who have to deal with the system and who have very real concerns. Let me refer to the case of Kaye Edwards from Acrefair. Kaye is a freelancer and runs a consultancy business in Liverpool that has secured assignments for many other freelancers during the last 10 years. She has serious concerns about the off-payroll IR35 tax legislation in the public sector, and believes it would dramatically damage the UK if it were extended to the private sector. She believes her personal assignments and her company will be severely impacted by the proposed legislation. She states that her company is small and struggled through the credit crunch. She is of the opinion that companies like hers helped to bolster the economy during that period and are now battling uncertainty, which is not helped by the issues surrounding Brexit.
Kaye believes that the administration and lack of clarity on off-payroll legislation will make it either very difficult or untenable to continue her business. She believes that there are real concerns about the responses from HMRC and the Treasury. I am drawn to think of what my hon. Friend the Member for Rutherglen and Hamilton West said about HMRC and its lack of success rate in the cases that have brought against it.
Kaye Edwards claims that there have been many recent surveys on what would happen if IR35 were applied to the private sector. She thinks the widespread theme is that UK businesses will be subject to major disruption on all fronts. Increasing costs, shrinking talent pools, reduced flexibility, and legal challenges to status assessments are among the hurdles that firms are expected to have to navigate. She is fearful that the costs of doing business will rise, and claims that any current and future projects that are already planned for, costed, in progress and/or are funded by investment will be affected. She is especially fearful of how this will affect people working in IT, and feels that it could make some projects on low margins unprofitable, leading to cancellations and job losses. She is someone who has to deal with the situation on a day-to-day basis.
I have heard from another constituent on this issue. He runs a small company that is trying to develop its supply chain. Owing to the nature of the business, my constituent engages only in contract work, which involves travelling across the country. As such, he claims expenses for travel, accommodation, food and so forth. HMRC allows contractors working in the private sector to claim back 5% of the income that is generated through a contract to offset the admin costs of running a business. However, my constituent says other expenses will not be claimable. He argues that recent changes to travel and subsistence allowance mean that the contractors working under the rules of IR35 will not be able to claim on everyday expenses, such as travel, hotels, meals and so on. He believes that HMRC will reclassify those earnings as liable to tax and national insurance contributions if they do not meet its test. My constituent claims that this is notoriously difficult to do; in many cases, contractors’ expenses will not meet the test, causing a significant loss of income.
I apologise for reading that word-for-word; with the complexities involved, I am rather fearful of not doing so. Can the Minister clarify some of those concerns? My constituents are committed to the business work that they do, and these sorts of workers are very important in my local area. However, they are clearly worried about the proposed changes. I hope the Minister reassures us in some way and deals with the situation—it is causing great concern to my constituents who are likely to be affected by it.
It is a pleasure to serve under your chairmanship, Mr Gapes. I commend my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) for securing the debate and pulling together the necessary support from the Backbench Business Committee. This debate is a good example of the constituency MP in action and effectively representing constituents—the sentiments expressed so far by my hon. Friends indicate that.
I had never heard of IR35 until a constituent came to see me about it and asked me, “What do you know about IR35?” I had to confess: “Nothing. I have never heard of it.” I was in for a quick education, however, as he iterated his deep concerns about the changes. I must confess, having never before seen, heard of or understood IR35, I share his alarm. It is only right that the Minister recognises the deep and genuine concern about the issue, which is shared not only by constituents, but by hon. Members who have been made aware of it.
My hon. Friend encapsulated that concern—the changes to IR35 are akin to using a sledgehammer to crack a nut. I am heartened to see Labour MPs standing up for freelance workers and raising concerns about the policies that the Conservative Government have proposed, which could damage entrepreneurship, workers’ rights and private sector businesses. That is quite curious, as the narrative is usually the other way around.
I am aware that the original IR35 legislation was introduced by the previous Government some time before I entered the House, but I refer hon. Members to what the current Chancellor said in November 2001, at the time of its introduction:
“One reason why the Government’s IR35 initiative has been so damaging and destructive is the fact that it has hit at the most flexible part of the economy.”—[Official Report, 6 November 2001; Vol. 374, c. 16WH.]
It would be interesting to see if the Minister can explain how the reforms are no longer as damaging and destructive as his boss previously thought.
In February, I submitted a written question to the Financial Secretary to the Treasury. In his answer, he said:
“The reform does not change the amount of tax payable by the firm engaging the worker.”
I am afraid that that is factually incorrect. Before the reform, the firm that engaged the worker did not expect to pay employer national insurance contributions. The person of significant control did that, and deducted it from the amount received from the engager. After the reform, the engager will pay employer national insurance contributions on top of the amount paid to the person of significant control.
The figures produced by the Office for Budget Responsibility have the highest uncertainty rating possible, with no data available on the behavioural effects. My hon. Friend the Member for Rutherglen and Hamilton West indicated that the potential effects could be devastating for firms, which may have to contend with cumbersome administration burdens and face considerably increased costs both to retain and to hire contingent workers, particularly those that require overnight stays to complete the work. As extra costs to business are inevitable, firms clearly need more notice so that they can plan accordingly. They face hard choices to decide whether to increase costs or cancel or delay existing projects.
Of course, some firms will no doubt be in a position to pass any extra costs on to the contingent workers whom they hire by reducing the amount that they pay. Sadly, those in weaker bargaining positions and with lower earnings will be most affected. Those given a Hobson’s choice will end up classed as employees for tax only, but will not have any of the associated employment rights. That seems entirely contrary to the Government’s good work plan.
There are clear concerns about the complexity of employment status assessments, which HMRC’s check employment status for tax tool, or CEST tool, has been unable to overcome. It is worrying that HMRC promotes the use of a tool that gives incorrect results, as evidenced by the Lorraine Kelly case, which has been mentioned. Given that HMRC loses the vast majority of IR35 cases in court, how can it adequately educate and prepare the entire private sector to accurately assess the status of the contingent workforce? Should a teacher who consistently fails their own exams be the one chosen to teach the lessons? We must reflect on the complexity and incompetence that pervade the system.
Putting the financial implications to one side, the logistical challenges for the private sector are enormous. An estimated 600,000 self-employed freelancers work in the UK, and they and their firms will be affected by the reforms. Every single engagement needs to have a status assessment completed, and I am told that each assessment takes approximately one and a half hours, so over 1,000 status experts would be required to complete the next six months. There are simply not that many available, and even if there were, the level of inconsistency across them would create more uncertainty.
Firms that think they have correctly assessed genuinely self-employed people will themselves have no certainty, because HMRC can challenge the situation at a later date and go back six years if it considers that the firm has been careless. Every firm will have to prepare for the reforms within 12 months, but where are the warnings and support from HMRC and the Treasury?
In the light of the very subjective nature of the tests, HMRC will always be able to take an angle, which could mean that a firm will have to battle for many years to defend itself, at considerable cost to its business. The level of possible tax risk and penalties for firms could be crippling. Cambridge University estimated a tax risk equal to 56% of the original cost of hiring the self-employed worker. That risk will accumulate every year for each worker hired, and put an uncertain risk on the balance sheet of every UK business that is engaged in the practice.
That kind of risk will need to be evaluated during any potential company sale, which could reduce the attractiveness, value and shareholder value of the firm. Will firms still consider the UK as a base for operations when that kind of uncertain financial environment is the newly laid foundation of the British economy? If a growing company needs to hire contingent workers, will it choose the UK as its base?
The new proposals also introduce a new tax. It is based on a subjective assessment by the client, which could be wrong, yet there is no route to appeal. HMRC has suggested that firms should manage the appeal process themselves, but asking the perpetrator to judge their own situation is hardly a valid appeal and does not enable a taxpayer to seek natural justice through the courts. The new proposals effectively bestow on firms powers to make tax judgments that affect someone else’s wellbeing without there being any proper way to appeal. If HMRC cannot get the assessment decisions right, is it fair to put them into the hands of firms that have a vested interest—to avoid tax risk—in wrongly claiming that the worker is caught by the legislation? That will clearly require some sort of independent arbitration service, but the assessments need to be completed before the work begins. How is that possible when the service would need to deal with around 600,000 assessments a year?
I sympathise with the Treasury’s challenge. It is concerned about the projected decrease in employer’s national insurance contributions, as the modern workforce changes and more people move to flexible self-employment. The Treasury wants to take the same sized slice of tax from everyone who provides labour, irrespective of their employment status. Unfortunately, the tax system has not kept up with the modern way of working, and employer’s national insurance is now seen as an unnecessary cost by firms that can much more easily obtain the services that they need from the contingent workforce, particularly with platform-based or gig-based working.
The employer’s national insurance of 13.8% is, in all but name, a payroll tax, which firms that hire contractors do not have to pay. It is the £60-billion elephant in the room. Contractors, because of various changes over the years, pay largely proportional taxes to those on a salary, and any historical tax advantages are small compared to the chunk of employer’s national insurance that firms do not have to pay when they hire the self-employed. If the tax differential was closed, none of us would be standing here today and there would be no such thing as “deemed employees” or IR35.
If the Government are concerned about falling revenues because of the self-employed, they should ditch the introduction of a new complex tax that is based on the already failed IR35, and instead just introduce a new off-payroll tax that applies to all firms that hire freelancers who are off-payroll. A small but simple tax would be far preferable to the large and uncertain one. To re-class those people as “deemed employees”, without giving them employment rights, is not the answer and never has been. The concept is ideologically flawed and will damage the flexibility of the British economy as the UK attempts to find its feet in these particularly uncertain times for the economy and its prospects for growth.
I shall close by asking the Minister some direct questions. If, as HMRC has claimed, a third of workers are probably “deemed employees”, how come HMRC keeps losing IR35 cases in court? In the light of the inaccuracy of HMRC’s CEST tool, and the lack of evidence about testing and accuracy, can the Minister assure us that the tool will undergo formal independent scrutiny to ascertain its worthiness, before any future enhancements are released to the wider sector? What studies has the Treasury conducted to consider the impact of the reforms on the self-employed?
It is a pleasure to serve under your chairmanship, Mr Gapes, even though it looks as though that will be brief. I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing the debate. Those of us in the Chamber today share common ground on the problems of IR35. The hon. Gentleman said that we all wanted to see what was due to be collected in taxes being collected to pay for the services from which we all benefit. That is an important point to bear in mind, and we share that view, but that is not to take away from the difficulties that have been presented in the Chamber so eloquently today.
The hon. Gentleman referred to the Taylor review and the need to get the recommendations in play with some speed, and to the conflict between agencies and contractors. He also made a good point, on which we need to reflect, about our future relationship with the EU—the crisis that we currently face over EU membership. That should be food for thought for Ministers in relation to a possible delay to the further roll-out of IR35. The hon. Gentleman talked about his constituent and mentioned that large companies often have sophisticated tax systems and resources that are not available to those who are often affected.
[Sir David Amess in the Chair]
The hon. Member for Brentford and Isleworth (Ruth Cadbury) talked about the unintended consequences of IR35, moving on to the loan charge, which I will touch on in a few moments, and in particular the confusion in the NHS and other public bodies. She mentioned those working flexibly with the NHS to meets its needs. Another point that I agreed with was that the effect of rolling IR35 into Brexit is to increase the unattractiveness of going into such jobs and accelerate chronic staff shortages by trying to force into the PAYE system people who do not want to be in it.
The hon. Member for Clwyd South (Susan Elan Jones) also talked about public sector damage, but she reflected on it in terms of IR35 being applied to the private sector. She expressed concerns that this was the wrong time, given Brexit as well as IR35. She quoted her constituents’ worries about additional costs, shrinking talent pools, legal challenges, investment losses and the expenses incurred. She mentioned the impact on IT businesses specifically, which is to make some unviable or unable to operate at all.
The hon. Member for Glasgow North East (Mr Sweeney) talked about how, when IR35 was introduced, the issues around it became relevant and very present, showing up as a genuine concern for many people. He highlighted the real extra costs to businesses and, as was said earlier, the number of IR35 court cases lost by HMRC. The Government must reflect on that when they look at this. The hon. Gentleman also rightly talked about the lack of advice, warning or assistance from HMRC, moving on to the risk of the penalties incurred and of further extension of IR35 making it even less attractive to do business throughout the UK, especially in current circumstances.
The SNP has expressed concerns about the extension of IR35 since it was proposed in 2017. The UK Government must pay close attention to their own technical review and rule out extending IR35 rules until contractors’ concerns have been addressed. HMRC has been described as using a hammer to crack a nut, but this UK Government have had to be dragged kicking and screaming into tackling major, systematic tax avoidance and evasion. The extension was proposed through the Finance Act 2017, and since then the SNP concern has been about the key effect on contractors supplying public sector bodies. It is only right for such contractors to pay their fair share of tax, but they have been left with an unfairly high level of bureaucracy, making it even more difficult for them to play their flexible role within the economy, as those in the sector have confirmed. Experts have expressed concerns that IR35 does not even achieve its stated aim of equalising tax between those in its scope and employees.
IR35 has also made things more difficult for public sector organisations in rural communities, something I know a lot about, being a highland MP. In rural areas, we often rely on contractors to fill vacancies and to employ key staff—teachers, doctors, nurses and such key people in our communities—so we have great concerns about the further impact on contractors if IR35 is extended for the private sector in April 2020, as proposed.
We have expressed such concerns repeatedly. Indeed, my hon. Friend the Member for Aberdeen North (Kirsty Blackman) first warned the Chancellor about the risks of the expansion of IR35 during the April 2017 finance debate. The UK Government failed to listen then and, when we raised it again, later in 2017 and in 2018. Here we are in 2019, once again asking the Minister to listen. Will this be the day when ears are unblocked? I hope so. Will this be the day when the message gets through? Let us hope that as well. The UK Government should use the 2019 Budget and Finance Bill to address IR35’s negative impact on contracted staff and our public services.
Earlier today, in the main Chamber, the loan charge was being debated. That is distinct from IR35, but some tax advisers have reportedly informed clients that IR35 required them to utilise tax vehicles now being tackled by the loan charge. For tax professionals to advise clients to use such loopholes is plainly wrong. People should of course pay their fair share of tax to support public services, but the UK Government must now pursue organisations that facilitated such loans. For those caught up in loan charge issues, there is great concern that HMRC has failed to work constructively with those seeking a loan charge repayment.
I thank the hon. Gentleman for giving way, and my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) for securing the debate—I am sorry, I should have done that earlier. I was in the loan charge debate, which has been suspended because rain is penetrating the main Chamber, so I came over to this debate. I want to add something now that I said in the other debate. Until the past three or four years, many of the early adopters of the loan charge were doing so with the strong advice of chartered accountants. In my earlier speech, I included at least two pieces of evidence to show that there was no uncertainty about the loan charge—it was legitimate. One was a memo written by an HMRC staff member in 2006 about loan arrangements being legitimate, fine and approved; the other was the Rangers case.
I hope that the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) will have a look at some of the contributions made during the other debate. Having done so, he will be able to agree with me that there is a lot of confusion and that people were not behaving illegally.
I thank the hon. Lady for that intervention, which allows me to agree with her—I too attended the early part of the main Chamber debate before coming here—and to say what a pleasure it is to serve under your chairmanship as well, Sir David. It is a particular problem that the companies that gave such advice are not being pursued, and the Minister must do something. As a final comment on the hon. Lady’s intervention, given the state of politics in this place, it is hardly surprising that the roof has fallen in on Westminster.
Among those caught up in the loan charge issues, there is great and heartfelt concern that HMRC has failed. It has failed to work constructively with those seeking a loan charge repayment plan to pay the taxes demanded. Often, that is bundled up with fines and additional costs. It cannot be right that people are pushed into desperation, or face the threat of losing their family home or of bankruptcy when a more thoughtful, flexible and fair approach should and must be taken. My hon. Friend the Member for Aberdeen North tabled early-day motion 2241, and I encourage Members to sign it. We hope that the UK Government and the Minister will force HMRC to change tack and work constructively with those seeking reasonable treatment of people due to pay fair tax payments for unpaid amounts and to remove the threat of bankruptcy and homelessness.
In conclusion, IR35 is not in a state to be further expanded at the moment. That has been clear throughout, in the comments by Members in this debate and from what we have heard about those who have experienced the effects, such as contractors and the people trying to deal with IR35 in our public services. It cannot be right for the Government to steam ahead without taking that into consideration.
It is a pleasure to serve under your chairmanship, Sir David. I congratulate my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) on securing this debate. It is also a pleasure to sit opposite the Minister. I had withdrawal symptoms after the end of the no-deal statutory instruments. I am afraid this subject has a similar level of complexity as the subjects we discussed in relation to no-deal preparations.
As many hon. Friends and Members have mentioned, IR35 arrangements are designed to operate in relation to workers involved in so-called off-payroll working. They cover situations where people work for a client through their own intermediary, often a personal service company. We have heard many examples in the debate. If people were providing their services directly, they would be classified as an employee. However, as a result of the arrangements, IR35 workers pay income tax and national insurance contributions in a different way to an employee. Individuals who work in such a manner benefit from increased flexibility and reduced tax liability, but the IR35 rules are intended to ensure that they pay broadly the same tax and national insurance contributions as an employee.
As we have discussed, the rules have applied to public sector bodies since 2017, and the Government confirmed at the 2018 Budget that they would extend the change to the private sector. The Government have just launched a technical consultation about the new arrangements.
Self-employment and contractual arrangements are a vital part of the UK economy. People who are genuinely self-employed deserve to be properly supported, while also ensuring that everyone pays the right amount of tax. However, there are real concerns that workers are being forced into self-employment by unscrupulous employers to avoid costs and their duties to workers. Both the law and the Exchequer are struggling to keep up on this issue—a point that has been made by various speakers today. HMRC estimates that it loses about £3 billion a year because of self-employment in name only.
There is a problem, but at the root of it is the gap between how work is characterised for tax purposes and how it is characterised for the purposes of employment legislation. The Taylor review was meant to clarify at least the latter, as was mentioned by my hon. Friend the Member for Clwyd South (Susan Elan Jones) in a speech that was characteristic of all the speeches today when she spelled out the experiences of her constituents, and appropriately so. The Taylor review had many flaws. I will not go into all of them now, but it suggested that, for example, sick pay could be traded for a weakening of minimum wage rules—certainly not something that I would support—and that came at the same time as the courts were recognising that many alleged self-employed workers were anything but.
However, the review did offer a number of recommendations that the Government have sadly been extremely slow to consider. The lack of clarity over the implementation of Taylor where it is warranted is leading to a huge number of problems, including the ones we have talked about, for genuinely self-employed contractors and for what we might call bogusly self-employed contractors, as well as for their employers, as they adapt to coverage by IR35, knowing that even the IR35 rules may be subject to change because of future alterations to employment law in the wake of the Taylor review.
It looks as though we will not see an immediate change, so HMRC is engaging in a process of what I call bricolage to try to bridge the gap, and the consequences are complicated and very confusing. The confusion was described appropriately by my hon. Friend the Member for Brentford and Isleworth (Ruth Cadbury), who talked about a constituency case. She was kind enough to share the details of the case with me before the debate. She was absolutely right to raise the concerns of her constituent.
I am grateful for that clarification. Regardless of where the individual was based in the country, the case was revelatory. In theory, with a levelling of the playing field upwards when the private sector is covered by IR35, some of the concerns about the leakage of highly skilled contractor staff from the public sector could be removed by the extension. However, the other problems that hon. Friends and Members have rightly referred to are still there, not least the problems that arise for small, often one-man or one-woman-band contractor companies that are trying to provide specialist skills on this basis, who may well end up being disadvantaged in relation to much larger providers of those specialist services. Surely we do not want that; surely we want to continue to have the innovation that exists in the complex ecology of different firms and freelancers offering such services.
We really need a joined-up approach to the issues that brings together the consideration of tax and employment law and levels up protections for the self-employed, as well as dealing with the current implications of the tax system that boost bogus self-employment. In the absence of that, we have the issues that we have been talking about today, and employers themselves are trying to find a third way through all of this, as we have seen with the GMB-Hermes deal recently, where a new employment classification has been created in the absence of any other way to improve the situation.
We do not have a coherent approach. It is unfortunate that, as Members have mentioned, the lessons have not been learned from the roll-out of IR35 to the public sector before it is rolled out to the private sector. I will not go through all of them now, as they were appropriately described by my hon. Friends, but one that I want to underline again is the concern about the finance and time that has to be spent by the self-employed who face uncertainty because of the new rules.
The kind of experience that individuals have had with the HMRC online tool, which has already been explained, is a common one. The tool is not based on all of the case law, and the case law itself is not very clear in how it directs us to determining the status of many different contractors, so it does not resolve the situation for many users. It puts an additional strain on contractors, including many individuals who, as has been mentioned, might be on quite low incomes and cannot absorb additional costs. The Government need to look at the issue at a legislative level, rather than the onus being on HMRC to try to deal with it in a technical and procedural manner. It simply cannot. A different approach needs to be taken. As we established in our previous general election manifesto, the burden of proof should be with the employer, so that the law assumes a worker is an employee unless the employer can prove otherwise. We need to be clear on that.
Concerns about the appeals process have been mentioned. I will not go into them in detail, but I will underline the questions asked by hon. Members. How can we be sure that the process will be fair when it is led by those who employ contractors effectively marking their own homework, in the memorable words of one hon. Friend?
The Institute of Chartered Accountants has stated that tax and benefit differentials between different types of work need to be addressed. There needs to be further consultation on what, if any, tax incentives are offered to the self-employed. That is one view from industry and it coincides with what was outlined in the Taylor report:
“Over the long term, in the interests of innovation, fair competition and sound public finances we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people.”
That brings me back to the fundamental issue that I will close with, Sir David.
It is a fact that the tax and legal status of work is not aligned, not certain and not comprehensible. It is impossible for many of those caught up in it to understand the right way forward. My party has said that we need a proper commission to look at it in detail, to modernise the law around employment status and to look at how it interrelates with tax status. We have presented a 20-point plan for security and equality at work. We need to build on that through a consultation that includes the voices of the people affected. We have heard so many of them in the short time that we have had today.
My hon. Friend is making important points about the flaws in current thinking. With the consultation on expansion due to start in the next month or so, there is an urgent risk. Does she think we need to pause and reassess the roll-out before we blunder into it and cause much damage?
I am very concerned that the consultation is going ahead and that the whole process is continuing, because the consultation does not focus on the problems with the public sector roll-out. I would have anticipated that any consultation to expand the approach would take those issues on board. I hope the Minister will address that in his response, specifically why there has not been the necessary change of direction.
We may need legislative change, as I suggested, because of the lack of clarity, but we should not treat individual contractors as guinea pigs while it all gets sorted out, given the impact it could have on them. I look forward to the Minister’s response.
It is a pleasure to serve under your chairmanship, Sir David, in this very dry Chamber. I acknowledge the six excellent speeches that I have listened to carefully. I hope I will be able to respond to the whole range of concerns that have been raised, and specifically on the way in which IR35 has been implemented, as well as on the implications of the Taylor review.
First, I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing this debate, and I thank everyone who has contributed. The Financial Secretary wanted to be here today—I suppose he could now come over and see how we are getting on—but the debate on disguised remuneration and the loan charge in the main Chamber meant he was unable to attend, so I am here in his place. I am conscious that disguised remuneration and the loan charge were mentioned by the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry), and I will come to that issue shortly.
The Government have a responsibility to ensure that everyone pays their fair share of tax—I am sure that feeling is shared across the House. We want to help people to pay the correct taxes on time by ensuring the system works as it is meant to. Some serious points have been made about the effectiveness of the system, which I will get to.
If the leak in the House had happened yesterday at 5 o’clock, there would have been conspiracy theories, but that is by the way. For small businesses and the self-employed who pay tax, we need a tax system that is simple to follow. Will there be changes in the tax system to make it simple to follow for small and medium businesses and the self-employed?
I certainly agree with the hon. Gentleman’s instinct that tax simplification is how all Governments should seek to develop tax reforms. I will make some observations about that later.
As we have heard, the Government have set about extending the reform of the rules that govern off-payroll working. Those rules, known as IR35, were introduced in 2000—in fact, in the previous year’s Budget—to ensure that people working through their own company, who but for the existence of that company would be taxed as employees, pay broadly the same tax and national insurance as other employees. The rules do not affect the genuinely self-employed, and the Government recognise the massive contribution that contractors make to business and public services across the country. Our aim is simply to ensure that contractors who work through their own company pay the right tax.
However, evidence suggests that the rules have frequently been misapplied, meaning that contractors acting as employees were incorrectly paying less tax than if they had been employed in the usual manner. In April 2017, the Government introduced reforms for public sector organisations that take on contractors through their own companies. The reforms mean that public sector organisations are now responsible for deciding whether the contractor is acting as an employee and is therefore within the rules, as well as for ensuring that the right amount of tax is paid.
HMRC estimates that the reform has raised an additional £550 million in income tax and national insurance contributions over the first 12 months.
I am not aware of any distribution analysis, but I will check with officials, and if I can give clarification on that, I will do so by letter.
Non-compliance in the private sector remains a persistent and growing problem that, if left unchecked, will cost the taxpayer as much as £1.3 billion by 2023-24, according to the Government’s estimates. In last year’s Budget, the Government announced that we will extend the reform of off-payroll working rules to all sectors, including the private and voluntary sectors. That will help to address the issue of non-compliance and to ensure there is a level playing field for the public sector and other sectors when hiring contractors.
The Government have listened to the views of individuals and businesses and have decided that the reform will apply only to medium and large organisations. It will not extend to the smallest 1.5 million businesses. In addition, it will take effect from April 2020, to give businesses and other organisations time to prepare. The Government are consulting on the detailed design of the planned reform, and we are listening carefully to the representations made. Our aim is to provide the individuals and organisations concerned with greater certainty about how the off-payroll working rules will operate from April 2020 in all sectors, including about the actions they can take to prepare for the changes.
Hon. Members talked about HMRC’s check employment status for tax—CEST—tool and raised some questions about its effectiveness. CEST was developed in consultation with stakeholders, including tax specialists and contractors, to assist individuals and public authorities in making the correct determinations. HMRC will stand by the result of CEST, provided the information entered is accurate and in line with HMRC guidance. It gives an answer in 85% of cases, and where it does not, more detailed guidance and support are available through a telephone number for individuals.
To support organisations in applying the rules, HMRC will continue to review and improve CEST. HMRC has already held user research sessions, and will continue to work with stakeholders over the coming months to ensure that the tool and the wider guidance suit the needs of all sectors, and to address specific points raised during the consultation. Enhancements will be tested and rolled out before the reforms are introduced in 2020. I asked officials for greater clarity on what that is likely to mean, and we are talking about improved guidance, better phraseology and improved language that gives greater certainty to individuals who make inquiries.
The hon. Member for Brentford and Isleworth (Ruth Cadbury) mentioned the issue of blanket decisions in the example she gave. Members have expressed concern that businesses might take a blanket approach to applying the off-payroll working rules to contractors without looking at the facts of individual cases. Independent research suggests that has not generally been the case in the public sector, where the reform has been in place since April 2017. I cannot account for every case, but research was done to evaluate the issue because it was a legitimate area of concern. The vast majority of public bodies are making assessments on a case-by-case basis. I have looked into how that research was done— HMRC commissioned an external independent organisation to speak to central Government Departments, the NHS and local government departments to ascertain that.
Having listened to people’s concerns, we included proposals in our recently published consultation to help to ensure that processes are put in place for individuals to resolve disputes with their engagers directly and in real time. The proposals would put a legal requirement on engagers to have a status disagreement process in place, and would require them to consider evidence provided by an individual contractor and review their status determinations accordingly. HMRC is committed to working with organisations to ensure they make the correct status determinations, and will publish detailed support and guidance to help organisations prepare well ahead of April 2020.
I thank the Minister for his response. We look forward to that research. I hope he checks it with bodies such as the NHS and ensures that the different levels and layers of the NHS are looked at. I have been given evidence that different trusts are doing different things and that NHS Improvement and the framework providers in the NHS are providing conflicting advice, which of course causes a problem for agencies and for workers themselves.
I am very happy to look into that and to see that that work is forensic enough to give a reliable read-out on actual behaviour.
Members also questioned whether there might be an additional burden on businesses that hire contractors, and raised concerns about introducing the reform at this time of uncertainty. As I mentioned, the reform simply enforces legislation that was introduced in 2000. Fundamentally, I believe it is fair that two people who work in a similar way pay broadly the same tax, and the businesses that hire individuals are best placed to determine whether these rules apply. Medium-sized and large organisations will have until April 2020 to implement the changes, and we will keep the existing rules for the smallest organisations, minimising administrative burdens for the vast majority of businesses and other organisations.
I turn now to employment rights, which the hon. Member for Oxford East (Anneliese Dodds) mentioned. I, too, have missed our exchanges in Delegated Legislation Committees, but it is good to be talking about another topic. Falling within the off-payroll working tax rules does not currently change an individual’s status for employment rights, as there is currently no direct link between employment taxes and those rights.
The Matthew Taylor review took place in summer 2017, and the good work plan was published in December 2018. As set out in that plan, the Government agree that reducing the differences between the tax and rights frameworks for employment status to a minimum is the right ambition. We will bring forward detailed proposals this year—I recognise the need for this to happen quickly—for how those frameworks could be aligned. In the meantime, it is right that the Government take action to improve compliance with existing rules. Those who wish to challenge their employment status for rights can take their case to an employment tribunal, regardless of their tax status.
Members suggested that there is a link between the off-payroll working rules and disguised remuneration schemes. Disguised remuneration arrangements have nothing to do with the off-payroll working rules; individuals are able to comply with those rules without entering into contrived avoidance. Trying to get around rules that are designed to ensure that everyone pays their fair share is not an excuse to use a tax avoidance scheme.
There was mention of some celebrated court cases. It is not appropriate for me to comment on individual cases. Obviously, many of those cases are very complex; only the very complicated cases make it to court. HMRC will work with businesses to ensure they are equipped to make the right determinations.
I want to be clear that this reform does not introduce a new tax but seeks to strengthen compliance with existing tax rules. The Government value immensely the contribution of the self-employed and flexible workers—various Members have made the point that they make up a much larger proportion of the UK workforce—and intend to protect them, but there are many legitimate commercial reasons for people to work through limited companies and for businesses to engage those companies, and that should not need to change. The off-payroll working rules exist to ensure that those individuals pay a fair amount of tax, and the Government believe it is right that we address non-compliance through these reforms.
I hope I have addressed the points that were raised. If there are any points I have not dealt with, I would be very happy to take on board the final remarks by the hon. Member for Rutherglen and Hamilton West and to write to any Member in lieu of responding appropriately.
I thank the Minister for his response and hon. Members for attending the debate. This is a very complicated issue, and it is not necessarily one that sets pulses racing. However, for the people affected, their livelihoods are at stake, so I am pleased that Members have had the opportunity to raise their constituents’ concerns.
My hon. Friend the Member for Brentford and Isleworth (Ruth Cadbury) spoke about what is going on in the NHS, and the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) pointed out how many public services in rural communities are dealt with in this manner. We have not yet got this right in the public sector. That is the crucial point: if we cannot get it right in the public sector, these issues will only be amplified in the private sector. We have to consider that carefully.
As my hon. Friend the Member for Clwyd South (Susan Elan Jones) said, people’s livelihoods and incomes are at risk because, for example, expenses will be treated as earnings. For a lot of small businesses, having expenses treated differently could be the difference between success and failure. Small decisions in this respect may have major impacts.
My hon. Friend the Member for Glasgow North East (Mr Sweeney) mentioned the CEST tool, which I touched on in my opening remarks. I am not comforted by what the Minister said about that tool, purely because I have experience of it in a previous life and I know just how inconclusive it can be.
I thank the Minister for that. I appreciate that we can have a constructive approach. I do not think any of us disagrees about the principles; this is about getting it right.
HMRC’s idea of working with people to assist them is different across the board. I point out gently to the Minister that it can be daunting for people to have HMRC assisting them, because it provides guidance but it is also the enforcer. People are therefore keen to get things right on their own, so we need a fair and transparent system that everyone can understand and use fairly. If we can get a tool that works, that is great, but let us make sure we have one before we come down too hard on people.
I did not hear the Minister confirm whether the changes will eventually be rolled out to small businesses in the private sector. I appreciate that he might not be in a position to answer that today. If the Government are considering that, I urge real caution. They have not suggested that yet, but, having come from a small business background, I can say that that would be a very difficult prospect.
My hon. Friend makes an important point about the roll-out being restricted to larger businesses, which the Minister referred to. The changes will inevitably also impact small businesses, which are contractors with areas of expertise. For example, a large bank such as Barclays might commission a software expert to come in and build a product or tool, and that expert might in turn employ staff to support that project. If we classify the person who runs that small business as an employee of the bank, how are they meant to pay their staff?
That is the fankle that this reform will result in. It will draw us into situations where thriving, dynamic businesses that are responsive to the needs of large businesses—small businesses that can, for example, plug into a large financial institution to deliver a bespoke project and detach again —are not able to function in that way because their people will be pulled in as payroll staff members. Does my hon. Friend agree that those will be some of the inevitable negative impacts for small businesses if the Government do not get their act together with these changes?
I absolutely agree. Small businesses will be affected by these changes anyway. People will be operating in a two-tier system, because many will work for small businesses as well as for large businesses in the private sector, and different rules will apply in those situations. I am not saying that is an argument for equalisation, because I still think it would be difficult for small businesses to act as the judge of whether someone falls under the scheme.
I am not in any way opposed to the principle of preventing tax avoidance. We all want to ensure that we boost tax revenues as much as possible, but that must be done fairly and transparently, and we must not destroy flexible working in the economy or self-employed people and small businesses in the process.
Question put and agreed to.
That this House has considered IR35 tax reforms.