Inquiry found rules to be “riddled with problems, unfairness and unintended consequences… the potential impact on the wider labour market has been overlooked by the government. A wholesale reform of IR35 is required.”

The report is critical of “numerous flaws” that “treats contractors as employees for tax purposes but do not qualify for employment rights, thus creating a class of zero-rights employees” and “places too great a burden on businesses”.

Summary of Lords Inquiry

It is right that everyone should pay their fair share of tax. But the evidence that we heard over the course of our inquiry suggests that the IR35 rules—the Government’s framework to tackle tax avoidance by those in ‘disguised employment’—have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed.

Until the beginning of the COVID-19 pandemic, the Government had planned to extend off‑payroll working rules to the private sector in April 2020. The off‑payroll working rules build on IR35, and the new proposals were designed to mirror similar rules implemented in the public sector in 2017. Under the new rules IR35 itself will not change. Instead, large- and medium-sized businesses will be responsible for enforcing a regime which HMRC has struggled with.

The Government’s aim was to legislate for the new private sector rules in this year’s Finance Bill. But following the COVID-19 outbreak, and the Government’s assessment that introducing new rules was inappropriate at an extremely difficult time for the economy, the implementation of the rules will be deferred for a year.

We welcome this delay. It is right not to impose unnecessary burdens on business at such a difficult time. However, given the dysfunctionality of the existing system, we call on the Government to use the extra time to rethink fundamentally its approach to the legislation. We understand why, in order to improve compliance and protect the tax base, transferring responsibility for operating the rules to clients was deemed a remedy for the problems which have beset IR35. But the Government made this decision after considering the issue too narrowly, in terms of its tax take. It has severely underestimated the costs to business of implementing the changes. It did not take full account of concerns raised by stakeholders. And it did not analyse sufficiently the unintended behavioural consequences of the proposed reforms or their wider potential impact on the labour market, and on the gig economy in particular.

It is likely that the off‑payroll changes will cause widespread disruption. Many of our witnesses described how the proposals had already encouraged blanket status determinations and the early termination of contracts. We also heard that many contractors had been left in an undesirable ‘halfway house’: they do not enjoy the rights that come with employment, yet they are considered employees for tax purposes. In short, they are “zero-rights employees”. Separating employment status for tax purposes from employment status under employment law also fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit.

The Government should therefore take the opportunity afforded by the delay to analyse holistically the problems that we have uncovered. If the Government continues with its plan to introduce the off‑payroll reforms in April 2021, it should commission an independent review of the earlier introduction of the off‑payroll rules in the public sector to analyse how introducing off‑payroll rules to the private sector will affect the labour market. It should also, after two years of promising to do so, finally implement the recommendations of the Taylor Review of modern working practices: that the taxation of labour should be made more consistent across different forms of employment, while at the same time improving the rights and entitlements of self-employed people. We believe that the Taylor Review proposals offer the best long-term alternative solution to the off‑payroll rules, and provide an opportunity to consider tax, rights and risk together.

The UK economy is facing its most severe crisis since the Second World War. Even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of COVID-19 is so great that it would be completely wrong for the Government to impose a new burden on business in the form of the existing off‑payroll proposals. However, business is likely to need considerably longer than a year to recover from the disruption caused by the COVID-19 pandemic. The Government should announce by October 2020 whether it will indeed implement the off‑payroll rules in April 2021, or whether any on-going impact to the economy resulting from the COVID-19 pandemic will require their implementation to be delayed further. In the longer term the Government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off‑payroll working rules which we lay out in this report.

Gradually throughout the year more and more companies have set the precedence for incoming IR35 reform by confirming that they will not be engaging with contractors regardless if they are considered outside IR35. Banks and financial companies alike all seem to be following suit.

For contractors working with RBS, Tesco Bank, Barclays, Lloyds and Morgan Stanley the future points towards being put onto the payroll before the reform is introduced on 6^th April 2020. The most likely outcome for contractors being put on the payroll through an umbrella company.

These companies are reportedly giving contractors no option but being paid via PAYE to avoid IR35 reform altogether. IR35 rules do not apply to contractors working through umbrella companies nor employees. Furthermore, HMRC will not dispute engagements in which independent workers are operating inside IR35.

This cautious strategy may not pay off however and could potentially pose a greater threat to private sector firms by scrapping all outside IR35 contractors. From where we’re sitting it may be a risk not worth taking, for the following reasons…

Potential skills shortage

Most contractors would prefer to continue working independently and outside IR35, so giving contractors an ultimatum to go PAYE or leave could mean private sector businesses risk losing their highly skilled, and sometimes irreplaceable, contractors if they decide to leave the contractors no choice.

From our work with over 100 businesses and recruitment agencies we have concluded that there could potentially be tens of thousands of opportunities for contractors wanting to carry on working outside IR35 like before. We are all unsure of how big of an impact the reform will really have but it may not be all doom and gloom for those wanting to maintain higher day-rates.

Significant cost implications

If the risk of losing your superior talent isn’t enough, shifting contractors onto the company payroll is a costly process, without even considering the overall costs of employment. If businesses opt for turning their genuine contractors into employees the cost of paying employer’s National Insurance Contributions is reason enough to re-think, especially for companies with hundreds/thousands of contractors. In addition to this, the various other expenses of employees run the total up higher than you think. Office and equipment costs, sick pay, holiday pay and paid maternity or paternity leave.

For hiring organisations who depend on keeping their finest contractors may often have no choice but to offer great employment contracts. Company cars and other employee benefits are often a way of making up for the money contractors will be losing out on.

In simple terms, although independent day-rates might seem more expensive to companies, a lot of the time hiring a contractor outside IR35 tends to be cheaper.

Administrative burden

With greater costs being taken into account and also the potential skills shortage, there is then the burden of putting thousands of contractors onto the payroll. Not only that but looking after these workers in line with an employer’s HR obligations.

While private sector firms might argue that assessing each and every contractor’s IR35 status is an intimidating job, in contrast to onboarding thousands of employees, it is at least a one-off task assuming that the details of the contractor’s engagement remain the same. 

Restricted business agility

The most valuable part of using contractors is the unrivalled flexibility they provide businesses. Private sector firms can engage contractors as and when they need them with not many strings attached. This is extremely helpful in handling fluctuations in demand. The ability for firms to scale their workforce to their will should not be underestimated and employing contractors in permanent positions will eliminate that benefit.

Only time will tell as to whether these financial services firms rethink their position. There is, however, at least one thing we are confident in: that IR35 reform is manageable and Qdos are engaging with many hiring organisations looking to ensure fair assessment of their workers.

Find out more about IR35 reform in the private sector

The vast majority of insurance companies worldwide are not prepared for the incoming accounting standard IFRS 17, despite recognising the significant risks it poses to their business

Data from 240 insurance firms reveals that 92% have yet to put their solutions in place, and that 88% know they will need to invest in new processes to support disclosure requirements.

That is according to a new report by Aptitude Software, with chief technology officer, Martin Redington, warning IFRS 17 will be the “most significant change to insurance accounting that has ever taken place”.

“Time is of the essence. It is a massive project with significant risks, and there is not a one-size-fits-all solution, bespoke solutions are required,” he said.

“Insurers need to be selecting their vendors now and working on implementing IFRS 17 financial accounting solutions to avoid the skills shortage and ensure they comply in time.”

The report shows that 78% of insurance companies are still in the early research and impact analysis phase of implementing the accounting standard, which comes into effect at the start of 2021.

It identifies a wide range of challenges that insurers will need to overcome, with 84% of firms having cited having a disparate actuarial environment as being a constraint to delivering consistent calculations.

In addition, it was found that 39% of insurance companies expect to kick off their implementation projects in the second quarter of this year, suggesting a huge demand for expertise at the same time, and a potential skills shortage.

Ernst & Young estimates that smaller life insurers with less than $10bn (£7.4bn) of gross written premium will need a budget of $25m to comply with IFRS 17, while those with more than $25bn will need to spend approximately $150m.

“Insurance company profits are under duress as many sectors have become commoditised and many firms recognise the need to innovate their offerings and operations,” Redington continued.

“In a post-IFRS 17 world, it will be difficult for CFOs to service the many financial and regulatory requirements without an approach that centralises control of reporting and financial data.

“IFRS 17 is already proving to be the straw that broke the camel’s back, driving insurance CFOs to modernise their financial systems.”

Liability insurers are facing a huge increase in potentially silent exposures as a result of the increased litigation and compensation claims expected following implementation of the EU General Data Protection Regulation (GDPR).

A DAC Beachcroft report that polled lawyers across the EU found that 80 percent of respondents expected the GDPR to increase litigation and compensation claims – which are typically insurable under liability policies.

“Litigation can really cost insurers and this increasing exposure is potentially a sleeping giant,” DAC Beachcroft partner Hans Allnutt told The Insurance Insider. “This issue is going to be acute in the UK because of a favourable litigation regime, but our report shows this is a pan-European issue.

“Because the GDPR is also aimed at corporations outside Europe, the GDPR represents a global data risk.”

The GDPR, which reforms existing data protection law and comes into force in May 2018, requires companies to notify clients of a data breach within 72 hours of discovery, and enables individuals to claim compensation for data protection breaches.

“There is an increasing recognition of the need to put individuals back in control of their privacy and personal data against the backdrop of big data,” said Allnutt. “The balance of power is tipping away from companies. This is reflected by increasing litigation across the whole of Europe. GDPR supercharges that trend.”

The maximum fine for breaching GDPR rules is the higher of EUR20mn ($23mn) or 4 percent of a company’s total worldwide annual turnover.

Cover for GDPR compensation claims and legal costs is available under affirmative cyber policies, but Allnutt warned there would also be claims submitted under several types of liability policies, such as professional and general liability.

Insurers are getting their head around silent cyber because of recent statements issued by UK regulator the Prudential Regulation Authority, but they should also be aware of silent data risk, he said.

“The same attention to wordings needs to be given around the silent data risk with the GDPR,” Allnutt added.

Current Data Protection Act-insuring clauses and exclusions need to be scrutinised now in anticipation of the GDPR coming into effect next May, he continued.

“Just as for cyber risk, insurers need to decide their appetite for insuring liabilities for privacy breaches. They should be aware that privacy liabilities extend beyond just the GDPR, so if they do not want to insure this risk, they should look at their current exclusions and be mindful that a simple GDPR exclusion might not be wide enough.”

One grey area is the insurability of GDPR fines. Allnutt said it was difficult to cite a single law that explicitly stated that GDPR fines were uninsurable.

“The lack of clarity over whether fines are insurable has caused some frustration but I do think the issue is akin to sanctions exclusions,” he said. “Everyone accepts that an insurer would not make a payment to a company that would breach sanction laws.”