Thirty Fifth Report Contents

Thirty Fifth Report

Instruments drawn to the special attention of the House

Social Security Contributions (Intermediaries) (Miscellaneous Amendments) Regulations 2020 (SI 2020/1220)

Date laid: 6 November 2020

Parliamentary procedure: negative

This instrument implements off-payroll working rules that were introduced in the public sector in April 2017 for medium and large organisations in the private and third sectors. These organisations, rather than individual contractors, will be responsible for determining whether the off-payroll working rules should apply. They, or any agency or third party paying the contractor, will also be responsible for deducting employment taxes and National Insurance contributions. The reform was first announced at Budget 2018, but its introduction has been delayed until April 2021 to give businesses more time to recover from the economic impact of the pandemic. There are considerable concerns about the impact of the reform, in particular about businesses laying off contractors, and the need for a more holistic approach that not only deals with tax on employment but also considers people’s rights across different forms of employment. These are issues that we anticipate will be of interest to the House.

The instrument is drawn to the special attention of the House on the ground that it is politically or legally important and gives rise to issues of public policy likely to be of interest to the House.

1.This instrument has been laid by HM Revenue and Customs (HMRC) and HM Treasury (HMT) with an Explanatory Memorandum (EM). The instrument implements off-payroll working rules that were introduced in the public sector in April 2017 for medium and large organisations in the private and third sector. The changes will take effect from 6 April 2021.

Background

2.According to HMT, the off-payroll working rules, also known as IR35, were originally introduced in 2000 to ensure that someone working like an employee, but through a company, pays similar levels of tax to regular employees. HMT says that non-compliance with the off-payroll working rules is widespread, however, and that it is forecast to cost over £1.3 billion a year by 2023-24 in lost tax revenue.1

3.According to HMT, measures taken over the last 10 years to improve the effectiveness of the rules and to end persistent unfairness between two individuals working in the same way but paying different levels of tax, have had limited success. To address this unfairness and increase compliance, the way in which the rules operate in the public sector was reformed in April 2017. The reform shifted the responsibility for determining employment status from individual contractors to the organisation engaging them. The underlying rationale was that organisations are better equipped to make the correct employment status assessments, and that this also makes it easier for HMRC to monitor compliance.

4.Separately, the Government commissioned an independent review of modern working practices (“the Taylor review”) which reported in July 2017 and, amongst other findings, concluded that: “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.”2

The key changes made by this instrument

5.The Government announced at Budget 2018 that the changes that were introduced to off-payroll working in the public sector in April 2017 would be extended to medium and large organisations in the private and third sectors from April 2020. The Government subsequently announced in March 2020 that the reform would be delayed until April 2021 in response to the COVID-19 pandemic and as part of the Government’s economic response package. This instrument now makes the changes originally announced at Budget 2018.

6.The instrument shifts responsibility for operating the off-payroll working rules from the contractor to medium or large businesses and organisations in the private and third sectors to whom the contractor is supplying a service. This includes responsibility for deciding whether the rules should apply. These businesses and organisations, or any agency or third party which pay the contractor, will also be responsible for deducting the associated employment taxes and National Insurance contributions (NICs) and remitting them directly to HMRC using Real Time Information (RTI) reporting. The instrument implements these changes in social security legislation after the necessary changes were made in primary legislation through Schedule 1 to the Finance Act 2000.3 The changes will take effect from 6 April 2021.

7.The instrument exempts some 1.5 million small businesses4 and businesses “without a UK connection”5 from the changes, so that contractors, rather than these small businesses, will remain responsible for determining whether the off-payroll working rules apply.

8.The instrument further enables HMRC to recover any unpaid NICs debts from other parties within the labour supply chain, such as an agency with whom a business or organisation has a contract, where there is no realistic prospect of recovering the outstanding NICs liabilities within a reasonable period from those who are deemed to be the employer. The instrument requires HMRC to issue a recovery notice when seeking to recover a debt in this way and also provides for appeal rights for those who have been issued a recovery notice.

9.The instrument provides for any NICs liability to rest with the organisation or business, until it provides the contractor and agency with an assessment of whether the contractor would be an employee if engaged directly. This is called the Status Determination Statement. Organisations and businesses are required to maintain a status disagreement process.

10.While the changes apply to services provided on or after 6 April 2021, the instrument includes transitional provisions about payments made on or after 6 April 2021 for services provided before that date. HMRC told us that it will a use a “light touch approach to penalties”, so that businesses and organisations will not have to pay penalties for inaccuracies relating to the off-payroll working rules in the first 12 months unless there is evidence of deliberate non-compliance.

Consultation

11.The EM states that the Government consulted extensively on the reform, most recently on the detailed design of the changes.6 Changes that have been made in response to the consultation feedback include the exemption for small businesses and businesses from outside the UK and introducing a status disagreement process. HMRC told us that it has also considered and learnt from the experience of reforming the rules in the public sector in 2017, and that this learning has informed the support that is available to help private and third sector organisations make the correct determinations.

Guidance

12.HMRC has published guidance on the off-payroll working rules7 and provides support to those affected, including through one to one engagement, workshops and webinars. The EM states that HMRC also launched an enhanced version of its online Check Employment Status for Tax (CEST) tool8 alongside the latest guidance in November 2019.

Impact

13.HMT acknowledges that “shifting responsibility for determining employment status is a major change for employers and other organisations that use contractors and contingent labour”.9 The EM estimates that up to 60,000 organisations and businesses which engage off-payroll workers through agencies are in scope of the new rules. The EM identifies making status determinations for any new off-payroll engagements and maintaining a status disagreement process for off-payroll workers who seek to challenge their status determination as ongoing costs. Where these organisations and businesses engage contractors directly, they will also be responsible for deducting tax and NICs and remitting these directly to HMRC through RTI reporting. The EM also estimates that around 20,000 agencies that provide workers to medium or large organisations and businesses will be affected, and that they will need to operate payroll for any contractors they supply who fall within the scope of the rules. At the same time, the EM expects ongoing savings for around 230,000 contractors who will no longer have to determine their status for tax purposes, or the associated accounting burdens.

Concerns

14.The Finance Bill Sub-Committee of the House of Lords Economic Affairs Committee reported on the Government’s plans for reform in April 2020, concluding that the Government should use the delay of the reform until April 2021 as a result of the pandemic to “completely rethink this legislation”. The Sub-Committee suggested that the Government had not “sufficiently analysed the unintended behavioural consequences of the proposed reforms”, raising concerns that contractors were “already being laid off, despite the reforms’ delay” and highlighting that witnesses had told the Committee that the rules had made them “‘zero-rights employees’ with none of the rights of being an employee, or the tax advantages of being self-employed”. The Sub-Committee called on the Government to “keep its promise on implementing the recommendations of the Taylor Review: that the taxation of labour should be made more consistent across different forms of employment, and that there should be a fair balance between tax, rights and risk”.10

15.Lord Forsyth of Drumlean, who chaired the Finance Bill Sub-Committee, has tabled an annulment motion on the grounds that “the regulations do not reflect the guidance given by Her Majesty’s Revenue and Customs, and could result in National Insurance contributions being miscalculated and applied to payments that should not attract a National Insurance charge”.

16.We asked HMRC about the progress made with regard to the Taylor Review and why the Government had not chosen a more holistic approach that looked at employment taxes, status and rights in the round. HMRC told us that:

“The Government has already made significant progress in implementing recommendations arising from the independent Taylor Review of modern working practices. This includes legislating for stronger protections for vulnerable agency workers and extending the right to a written statement to workers, ensuring all workers have the right to a written record of their core terms of employment.

The Employment Bill that the Government will bring forward will deliver on a range of Manifesto commitments, including building on existing employment law with measures that protect those in the gig economy.

Work will continue cross-Government on these issues. Given the complexity and importance of the labour market policy, it is clear that careful deliberation is essential before considering any future reforms.

However, the Government cannot delay addressing the unfairness of off-payroll contractors paying less tax than employees when their engagement meets the test of an employment relationship, and the resulting loss of revenue needed for vital public services.”

17.We note that the Employment Bill is to address some key challenges of the current labour market, including issues reported by the Taylor Review. It is important therefore that the Government set out a clear timetable for this Bill.

18.We also asked HMRC why the changes had not been postponed beyond April 2021, giving businesses more time to recover from the economic impact of the pandemic. HMRC explained that:

“The Government has already made the decision to delay this reform until April 2021 in response to the COVID-19 crisis. However, there will not be a further delay. The primary legislation has now received Royal Assent, and the reform will be implemented in April 2021 as announced.

The reform was originally announced at Budget 2018. Many businesses were prepared for the reform to be implemented in April 2020 as originally planned, and HMRC have undertaken a significant program of education and support to ensure that large and medium-sized businesses are ready to implement the reform. Businesses have already been putting in place preparations for April 2021, and another postponement would lead to inconvenience and potentially additional costs. Further delaying implementation of these changes would have other very significant drawbacks. As well as the fiscal cost, it would prolong the fundamental unfairness of taxing two people differently for the same work. It would also extend the disparity between the private and voluntary sectors, and the public sector, where the reform has been in place since 2017.”

Conclusion

19.This instrument implements changes to off-payroll working in the private and third sectors that were first announced at Budget 2018. There are considerable concerns about the impact of the changes on businesses and the need for a more holistic approach that not only deals with tax on employment but also considers people’s rights across different forms of employment. We are particularly concerned about the timing of the changes as we believe that it is unlikely that all businesses will be able to prepare for the implementation of the new rules from 6 April 2021, at a time when they will still be recovering from the impact of the pandemic. We note an annulment motion has been tabled, providing an opportunity for these issues to be explored further. The instrument is drawn to the special attention of the House on the ground that it is politically or legally important and gives rise to issues of public policy likely to be of interest to the House.

Health Protection (Coronavirus, International Travel) (England) (Amendment) (No. 24) Regulations (SI 2020/1292)

Date laid: 16 November 2020

Parliamentary procedure: negative

This instrument amends the International Travel Regulations to allow workers coming to England for seasonal work at poultry farms an exemption from the requirement to self-isolate. It came into force on 17 November. At a time of national lockdown, we find this measure extraordinary and concerning, all the more so since it appears that no tailored programme of testing these workers is envisaged to address the potential infection risk. This exemption appears to put economic considerations above those of public health. The House may wish to press the minister for further explanation, including whether safer alternatives for achieving the policy objective of the instrument were considered.

These Regulations are drawn to the special attention of the House on the ground that they are politically or legally important or give rise to issues of public policy likely to be of interest to the House.

20.This instrument — which provides for an exemption from international travel restrictions — was laid, with an Explanatory Memorandum (EM), by the Department for Transport (DfT). Supplementary information provided by DfT is published at Appendix 1 of this report.

21.Since the instrument relates to food production, the Department for Environment, Food and Rural Affairs (Defra) also has an interest, and the Government have published guidance (“the guidance”) for workers and employers, drafted jointly by Defra and Public Health England.11

22.We note that the guidance is extensive and goes significantly beyond the requirements of the law. We have raised our concern in earlier reports about the risks of blurring the distinction between legal requirements and advice in guidance.

Content

23.This instrument amends the International Travel Regulations12 to allow workers coming to England for seasonal work at poultry farms an exemption from the requirement to self-isolate; they can mix with any other person living or working at the specified premises. It came into force on 17 November. The workers are allowed to “self-isolate” at their specified accommodation, when working at the specified premises and when travelling directly between the specified accommodation and the specified premises; this will allow them to start work as soon as they arrive.

24.The EM (paragraph 7.2) says that this exemption is being put in place to “prevent significant economic damage to an important UK sector”, to “prevent significant animal welfare issues” that would otherwise arise, and to “ensure an adequate supply of food for the Christmas period”.

The Committee’s concerns

25.According to DfT, the exemption provided for by this instrument is likely to be used by around 5,500 workers coming from a number of Eastern European countries, mainly Poland, Romania, Bulgaria and Hungary. Despite infection levels being currently very high in these countries, the workers are not required to provide evidence of a negative COVID-19 test before travelling, nor are they required to be tested on arrival at their place of work. The DfT told us that “as with all international passengers, testing is reserved for those displaying symptoms of COVID-19”. Although the guidance advises employers to provide workers with transport from the port or airport to their place of work, this is not required by law.

26.The Government guidance also advises employers to place workers in cohorts of about six, with whom they should live and work, to limit potential transmission to small numbers. However regulation 2 of the instrument “does not require P [the worker] to remain in isolation from any other person who is living or working on the specified farm.” There may, therefore, be a risk of infecting locally sourced farm workers.

27.The guidance says that a farmer, poultry producer, labour provider or agency bringing workers from overseas to work on farms in England, should give them appropriately translated guidance on any local restrictions and industry guidance on social distancing: “You should ask workers to give written confirmation that they have received and understood this information. If necessary, there should be translation facilities available.”

28.It also advises that employers “should make sure that for the first 14 days workers to not leave their designated accommodation, for example to go shopping”. While this is sensible advice, the House may wish to ask the minister how an employer can be expected to enforce it.

29.We asked the Government a number of questions about how this scheme would operate (see Appendix 1). We note that currently the testing and other requirements are all based on the assumption that an individual with symptoms will volunteer for a test that, if positive, will prevent them from working for at least 10 days. Meat packing plants have been a focus of infection in both America and Europe and we are surprised that no special measures are envisaged for this work scheme. In particular, the House may wish to ask the minister how the risks of asymptomatic transmission from these workers can be managed if no routine testing is carried out.

Conclusion

30.At a time of national lockdown, we find this measure extraordinary and concerning, all the more so since it appears that no tailored programme of testing these workers is envisaged to address the potential infection risk. This exemption appears to put economic considerations above those of public health. The House may wish to press the minister for further explanation, including whether safer alternatives for achieving the policy objective of the instrument were considered.


1 HMT, Review of changes to the off-payroll working rules: report and conclusions (27 February 2020): https://www.gov.uk/government/publications/review-of-changes-to-the-off-payroll-working-rules-report-and-conclusions [accessed 20 November 2020].

2 See BEIS, Good work: the Taylor review of modern working practices (11 July 2017), Chapter 14: https://www.gov.uk/government/publications/good-work-the-taylor-review-of-modern-working-practices [accessed 20 November 2020].

3 Finance Act 2020, Schedule 1.

4 The definition of a “small business” is based on the Companies Act 2006 and broadly means a company that meets at least two of the following criteria for two consecutive financial years: turnover of no more than £10.2 million; a balance sheet total (assets) of no more than £5.1 million; and an average of no more than 50 employees.

5 Based on the current residence and presence requirements for Class 1 NICs secondary contributors.

6 HMRC, ‘Draft secondary legislation: off-payroll working rules from April 2020(22 January 2020): https://www.gov.uk/government/consultations/draft-secondary-legislation-off-payroll-working-rules-from-april-2020 [accessed 20 November 2020].

7 HMRC, ‘Understanding off-payroll working (IR35)’ (22 August 2019): https://www.gov.uk/guidance/understanding-off-payroll-working-ir35 [accessed 20 November 2020].

8 HMRC, ‘Check employment status for tax’ (2 March 2017): https://www.gov.uk/guidance/check-employment-status-for-tax [accessed 20 November 2020].

9 HM Treasury, Review of changes to the off-payroll working rules: report and conclusions (27 February 2020): https://www.gov.uk/government/publications/review-of-changes-to-the-off-payroll-working-rules-report-and-conclusions [accessed 20 November 2020].

10 Economic Affairs Committee Finance Bill Sub-Committee, Off-Payroll working: treating people fairly, (1st Report, Session 2019-21, HL Paper 50).

11 Defra, ‘Coming to England for seasonal poultry work on farms and processing sites’ (17 November 2020): https://www.gov.uk/guidance/coming-to-england-for-seasonal-poultry-work-on-farms-and-processing-sites [accessed 25 November 2020].

12 Health Protection (Coronavirus, International Travel) (England) Regulations 2020 (SI 2020/568).




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