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On payroll or off payroll?

The last time Jesse Norman, a Conservative Member of Parliament (MP) in the UK, found his way onto my radar was when his book on the economist Adam Smith, Prophet of Profit?, came out. Among many things, it seems Smith was “notably progressive” in his views on labour market regulation. Progressive doesn’t figure into the current debate about the upcoming, controversial changes to the UK’s IR35 legislation. It is now Norman’s defence of those changes – in his role as Financial Secretary to the UK Treasury – which has put him back on my radar.

For those unaware of IR35, to quickly summarize, starting from 6th April 2020 large and medium size private sector businesses will be responsible for determining the tax status of contractors.

Norman’s most eye-catching defence of the IR35 changes, as recorded in Hansard, is the assertion that “there is only about a 10% compliance rate with proper tax payable in this [off-payroll] sector.”

The opposing side – the Stop The Off-Payroll Tax campaign – believes the changes are unfair because they equalise contractors’ tax liability with that of employees’ but don’t equalise labour rights e.g. entitlement to benefits like sick pay. The basis of the fairness component of the argument being that contractors should be more highly remunerated to compensate for their greater risk. One possibility, which I was alerted to in a wide ranging and interesting article in People Management is that once a ruling has re-classified an individual as an employee for tax purposes then that individual might be able to claim employee rights with the accompanying cost to the newly designated employer.

The objectors have had a degree of success. In February of this year it was announced that the changes will only apply to work undertaken from 6th April; previously the intention was for said changes to apply to work billed from 6th April irrespective of when the work was carried out. Additionally, the House of Lords Economic Affairs Committee invited written submissions – deadline 25th February – to help it examine concerns relating to IR35. It’s been commented that with the legislation planned to be introduced at the same time as the 11th March Budget, the noble Lords are cutting things rather fine.

That said there are 12 areas of examination, so it certainly looks comprehensive to me. I think it also passes the listening test by asking:

What has been the experience of the new off-payroll rules in the public sector? What lessons have been learned from this experience, and how have they affected the draft Finance Bill proposals?

The last of that set of questions was asked of Jesse Norman last year. His response that the public sector implementation of IR35 met “its objective of improving compliance with existing off-payroll working rules without disrupting public services or reducing labour market flexibility” was met with scepticism and outright criticism. It will be good to get some objectivity and clarity on this matter and the other points under examination. I will certainly be on the lookout for the Lords’ findings, not least as it will likely shape our new Chancellor’s view of what’s fair in the context of IR35. This is important as he has promised not to be heavy handed and will be fair in his handling of off-payroll tax. Most of us would expect nothing less but “fair” means different things to different people at different times.

The good news is that if you’ve got questions, the SAP Intelligent Spend Group is hosting an IR35 Workshop in June contact: emmanuel.oyenekan@sap.com for more details and to register.

First published on LinkedIn here

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