Lords call for complete rethink of IR35

Lords call for complete rethink of IR35

“Eye-opening” report slams “unfair” IR35

The House of Lords has published a conclusive report into IR35, finding the legislation to be riddled with problems, unfairnesses, and unintended consequences.” As a result, the Lords have recommended that the Government “completely rethinks”  these complex tax rules. 

After a lengthy investigation into IR35, the Lords Economic Affairs Finance Bill Sub-Committee welcomed the Government’s decision to postpone private sector changes but urged policymakers to use the next year to carry out “wholesale reform” to the legislation itself.  

With the Government having “overlooked” the “potential impact of the rules on the wider labour market”, Lord Forsyth, who chaired the Committee, asked: “How prepared will businesses recovering from the crisis be to take on this extra burden (referring to IR35 reform) next year?” The Government needs to think this through very carefully.”

Revisit IR35 reform in 6 months 

The “inherent flaws” of the IR35 rules and the uncertainty caused by COVID-19 led the Lords to call on the Government to announces in six months’ time whether it will “go ahead with reintroducing these proposals.”

In light of the unique circumstances, this advice has been welcomed by a number of IR35 specialists, including advisory, Qdos. The firm’s CEO, Seb Maley, who described the report as “eye-opening”, also said that “under the cloud of Coronavirus uncertainty, to commit to rolling out the changes in 12 months – albeit a year later than first planned – would be foolish. The seriousness of the Coronavirus pandemic means the goalposts may need to be shifted again. The Lords have made the right call, urging the Government to reassess things further down the line when contractors, businesses and the UK economy can see a way through this crisis.”

End zero-rights employment

Throughout the report, which IPSE described as a “much-needed dose of sense in the IR35 fiasco”, the issue of ‘zero-rights employment’ was focused on. The Lords made a point that many contractors tend to agree with – that individuals operating inside IR35, where they pay employment taxes, must receive employment rights in return. Lord Forsyth put this into perspective, explaining that inside IR35 contractors qualify for “none of the rights of being an employee, or the tax advantages of being self-employed.”  To address this problem, the Committee believes that the Government must deliver on its promise to implement the recommendations of the Taylor Review, “that calls for consistency in the taxation of labour across different forms of employment.”

Qdos CEO, Seb Maley, agreed: “Expecting contractors who are placed inside IR35 to work as ‘zero-rights employees’ is unrealistic, not to mention unjust and unfair. Tax status and employment rights must be aligned before the changes arrive, to at least hand contractors who pay employment taxes something in return.”

IR35 absent from Finance Bill 

The arrival of the Lords’ report came on the day of the second reading of the Finance Bill, that didn’t contain IR35 reform. While speculation has been mounting that this could mean IR35 changes will be delayed again or scrapped altogether, the Treasury’s Jesse Norman made it clear that reform will go ahead: “The Government will introduce an amendment to the Bill in due course to legislate for a new commencement date of 6th April 2021. The Government will use this additional time to commission further external research into the long-term effects of the reforms in the public sector, with the intention that that research will be available before the reforms come into effect in the private sector in April 2021.”

The 67-page House of Lords report ‘Off-payroll working: treating people fairly’, also raises further concerns over the reliability of CEST and argues that the introduction of changes will likely “cause widespread disruption.” You can read the publication in full here.


  • Justin says:

    This does speak to common sense, it’s a long time since I contracted, however the points raised that those inside IR35 have the limited employment rights of a contractor however the same tax obligations as an employee always rankled. You could be quite easily moved on (no notice or severance), no holiday pay, no sick pay yet subjected to the same tax as a regular employee.

    • Onlookers says:

      Totally unfair. Contractors take all risks to run business, pay corporation tax, VAT and host of other taxes and yet they find themselves at receiving ends.

  • Lee says:

    It’s also about choice. I CHOOSE to forego holiday pay, severance, paternity pay, sick pay, minimum wage policy, etc. I also choose to work with multiple clients (mostly international), at hours that suit me, and remain flexible to new opportunities at the risk of there being gaps when I’m not getting paid anything, at all. That’s the trade-off I make, and I expect the tax I pay to reflect that additional risk.

    I take no benefits, and ask nothing of the government other than to leave me alone to work the way I want to.

  • XY says:

    Some sense, let’s see what happens.

    The Treasury guy doesn’t speak for the govt, he will get told what to do (and if he tries to do a Sir Humphrey, Boris will send Dom and the boys round).

    I had some hopes for this govt but they faded fast when Sunak went ahead with this, with Redwood urging him to get rid of IR35 altogether.

    There have been so many false dawns, no reason to believe it this time.

  • XY says:

    Btw – the concept of inside IR35 having employment rights is also suspect.

    Compare these situations:

    1. People paying employees NI are entitled to a State pension. The govt receives the NI and they are responsible for providing the pension.

    2. People inside IR35 pay NI (both types) which the government receives. BUT in this case the company is responsible for the cost of most of the expensive employment rights (redundancy, holiday pay etc).

    There is a clear disconnect here and businesses would be right to point it out and cry “foul”.

    The real solution is to move away from Employers NI as a tax on jobs (or of working in a particular way). The we are all just workers, paying tax through the same bands, the only argument would be about claiming expenses (and why can’t all workers do that??).

    • steven says:

      you obviously don’t understand how the system of working for your own ltd company. this claiming for expense is not really what somone who works for the company that they own do, the company pays it. so for instance you have to travel say down to London if you live in Scotland and stay over night and see a customer or do a site visit or work on a particular project. if you worked for a company and they sent you it would all be booked by a person that deals with that, your hotel/B&B your travel and you would also be given either a per diem or a company card to use which you would be able to purchase food and drink against keeping hold of your receipts, you would then when finished go back and probably fill in an expenses sheet to say what you spent the money on and attach your receipt.

      Anyway its exactly the same for a contractor, except they are the ones booking the B&B and the travel and using the company debit/credit card to buy the food and drink etc. also keeping receipts and logging what they are for and reasons why.

      The big difference being is (especially if you are a one man band contractor) all the money in the company is the money you have earnt. so when you see a contractor and they are earning x amount more its not theirs its the companies, much like the money earnt by an employees company, and out of that money comes expenses and taxes, etc. then wages, and then on the profits 19% is paid in corporation tax…. then you if you have profit left you can decide to take a portion or all as a dividend or leave it in the company as profit.

      so it is exactly like a big company only you have to do all the leg work all the accounting (even if you have an accountant or accounting software which you have to pay for) also you pay all your indemnity insurances, public liability, employer insurance, as well as any fees for operating in your sector, and training to keep up with regulations…. and then on top of all that you don’t get holiday pay, maternity/paternity pay, sick pay, job security (although at the moment I know there isn’t much of that at the moment, but imagine being like that all the time!!), not to mention drumming up your own business, a lot of hours you are not getting paid for (this is one that is always missed by permanent staff, spending hours and hours doing paperwork or drumming up new business!)… the list goes on.

      • XY says:

        One of us doesn’t understand – clue: it ain’t me.

        Why lead with such provocative words?

        The key thing about expenses for employees is not what they do while on company business, it is about all the things that facilitate being at work at all.

        So, examples:

        Travel to work (season ticket etc).
        Work clothes (suits for some, overalls and steel toed boots for others).
        Even accommodation – if you need to work in, say London, while living in… Burnley. Why should we not be able to claim that as a tax deductible expense on our tax return?

        • XY says:

          And btw, the other difference that you mentioned but chose to pretty much ignore, is that the cost of stay-away accom is tax deductible for contractors but would have to be paid for out of taxed money for a permie. When we are trying to encourage people not to sit in their home town waiting for work to come to them, the expenses system is in a poor state.

          For a permie, they cannot even claim mileage that is deemed tobe “home to work”. A contractor has his office in his home, so travel to a client site is a business expense, as it should be. What I am saying is that it should also be a tax deductible expense for permies.

          Basically, any expenditure that is about providing your services, which you would not normally spend money on unless you’re in the employment that you are in… that should be tax deductible. The only reason you are buying it is so that you can do the job you have.

          • Rasta says:

            XY – Let’s be clear on your point.
            2 Permanent Staff working in Central London both earning say £50K:
            P1 lives in Greater London and pays £2K in travel to work
            P2 lives in Brighton and pays £7K in travel to work.

            Based on my interpretation of your logic:

            P1 should pay Income Tax on £50K-£2K = £48K and
            P2 should pay Income Tax on £50K-£7K = £43K

            However P1 pays much higher rent/mortgage than P2 because rents in London are generally higher than Sussex.

            P2 prefers to live in Brighton because of the beach
            and perceived access to better schooling.

            Why should P1 pay more tax than P2?

            In short “XY” when considering a Permanent Employment Contract the location and relative costs and advantages need to be factored into the contract prior to accepting the contract.

            Contractors routinely quote different rates dependent on the geographic location demanded by the Client.

            A Client differs from an Employer.

            Employees/Employers are subject to:

            The Employment Rights Act 1996
            The National Minimum Wage Act 1998
            The Working Time Regulations Act 1998 &
            The Pensions Act 2008

            Contractors might be subject to:

            The Employment Agencies Act 1973
            The Agency Workers Regulations Act 2010

            or a standard Contracting Agreement.

            The equivalence of a Contractor to a Permanent Employee is a floored concept accentuated by IR35. The unintended consequence is that within 6 months of implementing the current IR35 legislation Fixed Term Contracts will replace Permanent Contracts (which will be a disaster).

            As stated in a previous tweet the Government needs to shift the focus from “Disguised Employment” to “Disguised Salary”. The clue is the 35 in IR35. Simply for Personal Service Companies (PSC’s) prevent Dividends from being declared unless Salaries exceed £35K.
            This should equally apply to Builders, Hairdressers etc.

            The Furlough Scheme has flushed this issue out already identifying those paying themselves less than £8400 thus avoiding Employees NI and Employers NI. Then declaring Dividends; simply treat the first £35K as Gross Pay whether it is paid via Payroll or in “Dividends”.

  • XY says:

    Yeah, no cigar for you either “Rasta”.

    The person In Brighton may have nothing to do with the beach. You are simply trying to make it seems as though all permies working at a a distance from their place of work are doing so for a better lifestyle and that is patently a fabrication. My example was Burnley, or it could be Hull or anywhere – the salient fact is that the worker has costs and that they are costs of fulfilling their employment and nothing else.

    in the days when a woman stayed at home, kids were routinely uprooted and went to different schools, the woman went with the man’s job so they moved house. Now, both parents work, so they cannot simply uproot. Companies no longer pay relocation allowances (or even final salary pensions but that’s another story).

    Furthermore, the person based outside London simply cannot afford o buy a house there. The house market is so regionally skewed these days that there are ‘no go’ areas of the country for many people.

    Most of us would prefer to live with their extended family and never have to move away but that has not been viable for many years – except for those on benefits, many of whom stubbornly refuse to work anywhere else.

    There are endless stories of mining communities who refuse to work outside their own town, entire Welsh valleys who believe that they have a “right” to have work brought to them. It’s pie in the sky.

    Your nonsense about IR35 also shows zero understanding of what’s going on here. Self employed people don’t pay employers NI – nor do permanent employees – only employers do that. To force workers into a Ltd Co, then force them to pay employers NI in addition to all the income tax others pay… that is a joke.

    You have fallen victim to the green-eyed monster. Or some other form of delusion.

    Other uninformed comments…

    “Contractors quote different rates based on geography” … yeah and more often than not, clients don’t pay it.
    “The furlough scheme has flushed out…” yeah it has shown that forcing people to pay low salaries and then punishing them for it when times get tough is a case of adding insult to injury. This does not make the govt right, it makes them doubly wrong.

    Bottom line here: you need to understand that the artificial constructs of “employment statuses” are the root of the problem here. Take away employers Ni and we’re all largely in the same boat. Equalise rights to expenses and we are definitely all in the same boat – just workers with no need to worry about tax status since we would all pay the same rates.

    Ask yourself why no other country has Employers NI.

    • Rasta says:


      In respect of uninformed comments:

      For the record many Contractors are sole Directors and Sole Shareholders of their own Limited Company. Their Day Rate will be paid to the Company and the Contractor will be paid through their own payroll system. If the pay exceeds £8400 per annum then both Employers NI and Employees NI are payable to HMRC either monthly or quarterly.

      All subsequent profits are subject to Corporation Tax which is also payable to HMRC. You really are trying to compare Apples with Pears as stated already.

      • XY says:

        Ratsa – I have no idea how your statement of “the bleedin’ obvious” affects what has already been said.

        Profits are after expenses are deducted. So they claim expenses, profits are reduced, therefore tax due is reduced – we all know that.

        (Almost) everyone (including employees) fill in a tax return. That is where employees claim allowable expenses. Those who dig ditches can claim for work clothes but those who work in a suit, but never wear a suit at any other time apart from weddings and funerals… cannot.

        On the SATR an employee COULD be allowed to claim for travel and subsistence if the government chose to allow them do so.

        The tax system is rather complex – even many of those who have been contracting for some time don’t fully understand how it all works. i hope this helps you clarify a few key points.

        Note – the SA/PTR bridges the gap between company and personal tax in many ways and is the common factor among all workers. Worth bearing that in mind.

  • IR35 Victim says:

    I freelance because of bad experiences with managers in the past.

    I pay all the tax expected of me by law.

    It is totally unfair to create an underclass of worker that is so Victorian.

    THE problem is that HMRC and MP’s find it impossible to admit when they have done something wrong or stupid.

    The lords have no axe to grind and so in most cases you get rational ideas from them.

    Employee = Freelancer is a total fallacy, and helps to drive a wedge in the IT world.

    A major percentage of perm staff would like to go freelance but they require the stability of permanent employment.

    Comparing apples and pears.

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