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IR35 rules lead to an increased use of umbrella companies
by Susie Hughes at 08:30 15/02/22 (News on IR35)
The Economic Affairs’ Finance Bill Sub-Committee has written to the Government, listing the Sub-Committee’s main findings and conclusions on off-payroll working (IR35), after holding follow-up evidence sessions in December 2021.
The House of Lords' Committee’s initial inquiry was highly critical of IR35. This latest inquiry notes the sharp increase in the use of umbrella companies since the changes to IR35 in the private sector in April 2021 as well as the flaws in the CEST tool, and the lack of consistency across tax and employment rights.

Key recommendations
Its key recommendations are:

  • The Government's extension of off-payroll working rules to the private sector in April 2021 appear to have resulted in an increased use of umbrella companies;
  • The external research commissioned by HMRC into the implementation and impact of the extension of the off-payroll rules in the private sector should be accelerated and made more comprehensive and its findings published in full.
  • The Government must take a more coherent approach to the issue of employment status, which considers both tax and employment rights. It is unfair that individuals are treated as employees for tax purposes but without the rights which are normally associated with employment. To address this, the Government should press ahead with implementing the proposals set out in the 'Taylor Review of Modern Working Practices'.

The report also highlighted the 'unfairness' for workers to be trated as employees for tax purposes yet denied employment rights.

Lord Bridges of Headley, Chair of the House of Lords Economic Affairs Finance Bill Sub-Committee, said: “The whole point of the off-payroll reforms was to crack down on tax avoidance. Yet, as we warned the Government in our Sub-Committee’s report in 2020, it risks giving rise to a new wave of tax avoidance, as people — many of them on low incomes — end up in rogue umbrella companies. The Government must take action to protect workers from ‘rogue’ operators as a matter of urgency.

“It is right that HMRC commissions external research into the impact of these off-payroll rules. But by only focusing on engagers, it will only get half the story. Its scope needs to be widened to include contractors — and needs to be carried out more quickly.

“The Government has said it is committed to fairness in the workplace. However, it is unfair for individuals to be treated as employees for tax purposes without having employment rights. Our Sub-Committee reiterates the call we made in our 2020 report for the Government to press ahead with implementing the proposals set out in the Taylor Review.”

Inherent flaws
Self-employed represetnative group, IPSE, welcomed the report, particularly its recognition of the flaws in HMRC's online status test, CEST, and the unfairness of the current system.

Andy Chamberlain from self-employed representative group, IPSE said: “Their Lordships have once again cut through the complex web surrounding IR35 and have identified some key areas that must be addressed as a matter of urgency by the Government.

"In particular, the Committee is right to highlight the inherent flaws in HMRC’s CEST tool, which undermines the veracity of thousands of status determinations.

“Similarly, we fully support their recommendations around the need to clarify employment status rules and to ensure that individuals are treated fairly across both tax and employment rights.

"If action isn’t taken by the Government to solve this issue, then self-employed workers will continue to be in a ‘worst-of-both-worlds’ scenario where they are taxed as employees yet denied the full suite of benefits associated with employment.”

This comes hot on the heels of another critical report by the National Audit Office and a milder insight from a HMRC commission research from IFF Research. (See: Shout99 reports).

Further IR35 information
For more information about all aspects of IR35, including the controversial IR35 reforms see Shout99's News on IR35 section.

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Susie Hughes © Shout99 2022

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