IR35 double whammy: The Lords have skewered IR35, the Commons should do the same

By Harry Fone, grassroots campaign manager at the TaxPayers' Alliance

Today, members of the House of Commons are considering an amendment tabled by David Davis and Esther McVey (among others) proposing a further two year delay to the introduction of off-payroll working reforms or IR35 for short. Here at the TaxPayers’ Alliance, we strongly support their efforts.

This comes in the wake of a damning report by the House of Lords Economic Affairs Finance Bill Sub-Committee echoing the concerns raised by a contractor interviewed on this site. The reforms are designed to be tax changes that clamp down on contractors who are an employee of a firm in all but name, but the report describes the framework as “flawed” and has rightly recommended the government completely overhaul the plans. 

The major reason for the introduction of IR35 is to collect more tax revenue. Sadly, as is usually the case with such reforms, the unintended negative consequences will far outweigh any positives and will only serve to make the UK’s Byzantine tax code even more voluminous.

It is perhaps unsurprising that the reforms are proving exceptionally challenging to implement, given efforts to make IR35-style changes have been fraught with difficulty and lasted over 20 years. As long ago as 2010, the Office for Tax Simplification commented “of all the topics we tackled [IR35] proved to be the thorniest.” Undaunted by this, HMRC have pushed ahead regardless, despite the change securing only a microscopic increase in the tax take when implemented in the public sector.

The House of Lords Economic Affairs Finance Bill Sub-Committee Report

If you are affected by IR35, read the executive summary of the report. It confirms exactly what many worried contractors have been saying, and the report as a whole is strong, well-research analysis. It sets out a number of areas where the proposed reforms either have already done or likely will do damage.  

Supply of labour to the market

The public sector implementation of IR35 was hailed as a success by HMRC but their lordships did not agree. The following is a section of the report analysing the impact of the reforms on hiring contractors to work in the NHS:

“Another issue was how contractors reacted to the introduction of the public sector rules. IHPA [Independent Health Professionals Association] told us that many healthcare contractors were working less or had simply left the health service. NHS Digital had found it ‘an additional challenge to recruit and retain the right resources’. Some of its contractors left; some were prepared to stay only if paid more; others accepted the lower level of take-home pay. Where NHS Digital wished to retain contractors who would otherwise leave, it found that it had to pay them about 25% more.”

Similar issues were experienced at Transport for London, which ultimately led to the delay of upgrades to Bakerloo line trains. On the basis of its impact on the public sector, the committee expressed concern about the effect IR35 would have on the supply of labour to the private sector. A number of expert witnesses cited that many contractors would be lured overseas:

“John McVay of PACT thought that there were ‘plenty of other competing countries’ interested in attracting contractors working in the creative industries. StopIR35’s survey found that 28% of contractors had considered or were actively planning to work overseas.”

As the contractor told us in the interview, self-employed contractors involve a more specialised and flexible form of work, which many people at all levels are looking for. Some contractors were moved onto PAYE contracts but didn’t receive the same benefits as payroll employees. It was a double whammy, they were earning less and didn’t receive any perks to compensate. As I also learned, hiring a full-time contractor isn’t necessarily what firms want either. Many are used to help with projects that will take less than a year to complete. It makes sense that those seeking that flexibility would be willing to look elsewhere.  

Larger firms may be able to pay higher wages (via PAYE), or even hire full-time to attract contractors but SMEs are less likely to do so. Sourcing specialist workers will be more time consuming and expensive. Their businesses and the wider economy will likely suffer as a result of higher wage bills and diminished profits.

The “much criticised” HMRC tax tool

There was also further condemnation of HMRC’s Check Employment Status for Tax (CEST) tool, which was described as failing “to deal with ‘mutuality of obligation’” and as having added unnecessary complexity to the tax system. 

The report doesn’t mince words on the CEST tool and HMRC:

“…we conclude that HMRC is imposing a heavy burden on businesses by requiring them to determine status using a complex, fact-specific test. We agree with our witnesses that the support offered by HMRC in determining status—and the CEST tool in particular—falls well short of what is required.”

recent court case has highlighted this very issue, and the case likely cost taxpayers a small fortune in legal fees. This very much echoes what our contractor said describing the tool as, “unreliable when determining whether a role is in or out of the scope of IR35.”

Bringing in new legislation is one thing but it must be done in a way that is fair and simple to understand.


The pandemic has had a devastating impact on many lives and business across the country and chancellor Rishi Sunak took the correct decision to postpone the implementation of IR35, as the committees’ report notes: 

“We welcome the Government’s decision to postpone the start date for extending the off-payroll rules to the private sector to April 2021. A deferral is necessary, but business is likely to need considerably longer than a year to recover from the disruption caused by the COVID-19 pandemic. It is right not to impose unnecessary burdens on business at such a difficult time.”

The report goes a step further, urging the government to use this time to evaluate the suitability of the IR35 proposals – especially the costs and burdens that will be placed on businesses. The committee recommends an announcement by October 2020 as to whether the government will implement IR35 in April 2021 or not.

Recommendations and conclusions

The report makes a series of recommendations broken down into six key categories, mainly that “off-payroll rules should be: clear, simple, fair, support growth, easy to administer and simple to enforce.”  Although these are excellent specifications for reforming the UK tax code as whole - it is highly questionable whether anything needs changing at all when it comes to contractors. IR35 seems to be trying to solve a problem that doesn’t exist

Ultimately, working arrangements should be decided between employees and employers. While current circumstances do see self-employed contractors paying less tax, they also take on tremendous risk in terms of job security and lack of certainty about future earnings. Similarly, they don’t enjoy many of the benefits that on-payroll staff do: holiday pay, sick pay, maternity leave and much else besides. The system also works for businesses; they pay less in employment costs and have more flexibility to hire and fire. This in turn means lower costs for consumers. Win, win!

In post-Brexit Britain we will need a system that will create a dynamic, flourishing labour market. Contractors play a vital role in generating wealth for the country, helping to boost productivity and creating more jobs. We should be rewarding this success, not snuffing it out. 

With the tax burden already at a 50 year high, low-tax and pro-growth policies are exactly what the country needs. The lockdown has seen work patterns change and flexibility become more vital than ever before. IR35 shouldn’t have a place in the post-pandemic world. The amendment down today is a good first step to walk back from this unwise change altogether. 


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