IR35 Tax Reforms

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.

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.

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?

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.

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.

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.