Financial secretary to the treasury Jesse Norman was grilled by the House of Lords Finance Bill Sub-Committee on Monday over the government’s implementation of reforms to the IR35 legislation – particularly, over mistakes made drafting the legislation that would have affected the umbrella company market.
HM Revenue & Customs, the department that Mr Norman oversees, admitted last month that a poorly drafted provision of the Finance Bill would have unintentionally caught umbrella companies under the definition of “intermediary” of the new Off-Payroll IR35 rules, which are being extended to the private sector as of April next year.
This would mean all payments made to umbrellas would need to be made net of income tax and National Insurance, rendering umbrella companies redundant in the supply chain.
Despite the error being brought to HMRC’s attention in October, who then issued a press release saying that the department was “considering what action is required to ensure the off-payroll working rules apply as intended in order to provide certainty to those affected by the reform[s]“, lawmakers further compounded the error by using the erroneous definition again when tabling further legislation in November.
The fact that the scope of the definition has yet to be narrowed to exclude umbrellas was not overlooked by the Lords’ sub-committee, however, who gave the financial secretary to the treasury a grilling at their oral evidence session on Monday.
Members of the committee used terms such as “uneasy”, “very concerned” and “not treating Parliament properly” in conveying their displeasure to Norman. They also questioned who the specific stakeholders were.
After Mr Norman suggested that HMRC’s approach was “breaking new ground” in a “sensible and proportionate way”, Lord Bridges, chair of the sub-committee, told the minister: “We are very concerned that this is beginning to establish a very dangerous precedent, and the fact that you’re saying it’s breaking new ground really raises an enormous red flag in my mind that you think this is an acceptable way to proceed.”
Multiple members questioned why the government hadn’t taken alternative approaches, such as refraining from legislating until the necessary amendments had been made or omitting the defective clause from future legislation until it had been remedied.
In response, Norman argued that the measures taken were supported by stakeholders and were necessary to help firms affected by Off-Payroll prepare for their impending compliance obligations, stating:
“We wish to amend this, which is well understood by stakeholders. It would be a very radical move to remove the entire Statutory Instrument, and one that would be very badly received by stakeholders who are already preparing themselves accordingly. This is all before you get into the question of timing and parliamentary issues relating to laying a new Statutory Instrument.”
The Statutory Instrument to which Mr Norman refers is SI 2020/1220, the legislation that was tabled after the error had been brought to HMRC’s attention.
Inevitably, it was then posed to the financial secretary to the treasury that many companies are likely therefore making compliance preparations based on a legislative error, to which he replied:
“The error was picked up, communicated and discussed with stakeholders. We published a ministerial statement in the public domain, and so I don’t think there’s a great deal of likelihood that many people will have made preparations based on the previous arrangement.”
Mr Norman was even less convincing when asked about the government’s contingency plan should it be unable to suitably rectify the errant clause. HMRC and the Treasury are currently engaged in a consultation with stakeholders to address the issue, with less than four months to go until the Off-Payroll rules are to be extended to the private sector.
Whilst Norman expressed confidence in the government’s ability to reach a solution, he stopped shy of providing a guarantee when pressed, instead commenting: “What we have done is put a written ministerial statement in front of Parliament. I don’t think it would be appropriate to suggest that a stronger guarantee can be given to the committee.”
He also refused to provide any legal assurances to companies making compliance decisions based on the government’s stance, with the Statutory Instrument directly contradicting the subsequent ministerial statement.
When asked by Baroness Kramer whether he thought it was fit and proper for a company to ignore legislation based on advice in a ministerial statement, Mr Norman responded: “I have been completely clear on what the government is doing, and companies can take any advice that they seek as to how to proceed on that basis.”
Dave Chaplin, chief executive of the firm that uncovered the issues related to the errant clause in the legislation, responded to Norman’s appearance in front of the committee: “As the discussions indicated, HMRC and the Treasury knew the legislation contained defects before it was laid before Parliament, but then chose to do so anyway. I agree with Baroness Kramer, who described this as ‘unacceptable’.”
Chaplin also noted that Norman made “some vague reference” during his appearance to a new tax test. “Please, no new subjective tests!” Chaplin said.
“Despite the pandemic, there were no signs of further delay or cancellation. The supply chain needs to prepare. Firms that start preparing at least by Jan 2021 should find themselves in a good position and be able to continue hiring the talent they rely on.”
One of the Lords said at the end of the session that he expected the committee would be seeing Norman again soon. Norman smiled and said: “I look forward to it.”
9th December 2020.
