Lords astonished by HMRC’s lacklustre evidence in IR35 hearing

The Government’s tax and financial authorities have been accused by the House of Lords of delivering “rough justice” in it‘s approach to the Off-Payroll tax rules.

HMRC and the Treasury were called before the Finance Bill Sub-Committee hearing to explain why the IR35 rules appeared to be forcing genuinely self-employed workers into false employment.

Throughout the hearing, representatives from HMRC and the Treasury failed to provide convincing responses to the question posed to them by the Lords, including queries over the widespread misclassification of contractors, HMRC’s unrealistic compliance cost forecasts, and unsubstantiated estimates of existing IR35 non-compliance.

Throughout the meeting, which was held ahead of the subsequent delay to IR35, the Lords were eager to understand HMRC’s reaction to the predicament that ‘deemed employees’ have been placed into.

Lord Forsyth said: “The result is that the person doing the work is finding that their income is substantially reduced, and this is at a time in the economy where income is already going to be substantially reduced due to Coronavirus. Perfectly honest people will have that cost deducted from their revenue. That is the point.” After being asked about what the Government was doing to support contractors affected by the rule change, Lindsey Whyte, personal tax, welfare and pensions director at the Treasury, was unable to offer anything of relevance.

The Lords also raised the issue of blanket bans on the engagement of limited company contractors, which has been common in the public sector and that has allowed some employers to reduce their compliance requirements and risk.

When questioned on the issue, and the consequent impact on contractors being forced into umbrella and Pay As You Earn (PAYE) arrangements, representatives from HMRC and the Treasury said that their arrangements were “commercial decisions” made by the organisations in question. In response, Lord Forsyth said: “It might be a commercial decision, but it’s as a result of the change that you’ve made. You’re imposing a change that results in contractors’ commercial relationship being destroyed.”

In response, HMRC Off-Payroll reform programme director, Cerys MacDonald said: “The legislation is very clear that this practice is unlawful, and we do expect businesses to take reasonable care in those individual assessments.”

During the hearing, the Lords also questioned the effectiveness, transparency and fairness of the client-led status disagreement process.

Lord Forsyth asked: “How will you do that if the company, as a matter of policy, has decided they’re not going to deal with that?”

HMRC and the Treasury were also questioned about concerns over non-compliance and the actual revenue that would be raised from the change in the rules.

“The Lords clearly understood that the Off-Payroll Tax dishes out “rough justice”, concluded Lord Forsyth.

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