Furious peers pummel Osborne's 'flimsy' IR35 response

Furious peers yesterday attacked the government’s response to the PSC inquiry as “flimsy” and “dismissive,” made worse by the Treasury’s “inconceivable” refusal to attend.

The damning verdicts came in an impassioned yet often ill-tempered afternoon debate on the state’s 12-page reply to the peers’ 16 recommendations, produced by their six-month inquiry.

Speaking first, inquiry chair Baroness Noakes set the tone: “The government produced their response last week and while I thank them for that…I cannot say as much for its content.”

The Baroness then directly quoted to the House of Lords a ContractorUK article, in which a legal expert characterises the state’s response to her inquiry as a ‘clichéd PR job.’

“I don’t think I’d express it quite like that”, she informed the Lords’ main chamber, referring to the remark by contract law advisory Egos. “But I do know what they mean.”

The Baroness preferred that she was ‘disappointed’ by the state’s response, which was published last week and presented to parliament by George Osborne.

Specifically, the Tory peer said the chancellor’s reply “does not really answer our points” and “gives no comfort that HMRC has a firm grip” on IR35, which industry groups have regretted.

“If I were the Treasury,” added the Baroness, talking of the rule’s yield and cost, “I would be distinctly concerned about the approach of HMRC, which appears to be summarised as:

“‘We’re doing a bit more than we used to, but we don’t know how much we are spending on it [IR35], or what we get back from it.’”

She was referring to the state’s new breakdown of IR35 data, but she says the figures are “hardly any more information,” so the ex-accountant explained that she “remains sceptical”.    

But it’s not just the taxman who the Baroness isn’t pleased with: “The whole committee was disappointed that the Exchequer Secretary refused to give evidence.

“And to rub salt into the wound, he also refused Treasury officials to do so.”

Lords Myners, who brought about the PSC inquiry, spoke next, warning the chamber that he would “go further” in his criticisms than those by the “noble lady” who chaired the inquiry.

“Baroness Noakes says that she was disappointed because the Exchequer Secretary to the Treasury declined to be interviewed by the committee,” began the former City minister.

“The reasons given by the Exchequer Secretary, Mr Gauke, for not doing so were quite frankly not acceptable… and moreover, to say that his officials should not give evidence.

“Perhaps in that context it’s not all together surprising that we’ve had a very flimsy response… that shows a disservice to the hard work that was put in” by the inquiry members.

He added that the government’s representative at the debate, Lord Newby, should “go back to the Treasury and say we should not have been dismissive about this report as we have been.”

Lord Newby should also alert Mr Gauke and his colleagues to a “report of substance,” which raises “a number of important issues” that deserve “close attention from government.” 

Lord Myners wants such reports to reach the Treasury as he says its current message is ‘we don’t take this matter seriously’ or that they “just cannot be bothered to get to grips with” it.

Speaking third, Lord Palmer said he agreed with the submissions of his two fellow committee members, suggesting he wouldn’t need to spend time criticising the government’s response.

But it seems he couldn’t resist. “[The government’s response] didn’t really address many of the problems we raised,” he said. “[I’m] not happy with it.”

Lord Higgins, speaking later, supported: “The government’s response has been very inadequate… [it] doesn’t really solve the problems to which we have drawn attention.”

He also said: “A number of Treasury issues which we investigated and raised with other witnesses… we were unable to get a reply from the Treasury itself…so uncooperative”.

Pointing to the government’s reply at page 8, where it says why no Treasury official attended the inquiry, the Lord rubbished the explanation of Mr Gauke’s absence as “quite absurd.”

According to the Conservative peer, it is “inconceivable” that the Treasury minister declined to appear – but “even more inconceivable” that he refused all Treasury officials to do so.

Like Baroness Noakes, the Lord says that the newly released IR35 exchequer protection data “does not significantly add anything,” so his “serious doubts” about the £550m total remain.

After his submission, Baroness Morgan hinted that both HMRC’s questionable figures and HMT’s questionable decision not to co-operate smacked of the same thing:

“It was disappointing, in fact it was incomprehensible…that evidence from HMRC was inconsistent and that Her Majesty’s Treasury (HMT) refused to even contribute.”

Of her reflection, the Baroness deduced: “I have to say…these [recommendations] have not so far been taken seriously by the government.”

A similar condemnation then came from Lord Davidson, a Labour peer who did not sit on the committee but who joined the debate for being a shadow spokesman for HMT.

He said: “One might expect a reasonably articulate view from the government after some 14 years of operation of this apparent deterrent effect…

“[But] the exchequer protection ‘guess’ is not so impressive when the government wasn’t prepared to co-operate with the committee.”

As a result, Lord Davidson said any welcome of the state’s move to reply to the PSC committee should be “tempered by much of the responses of the government.”

More upbeat was Lord Hope who, like other peers at the debate, said it was “positive” that the ‘service company questions’ would now be reviewed, as the committee recommended.

However, he is “less impressed” with the government’s response to the committee’s questioning recommendation as to whether enough resources are allocated to police IR35.

Lord Hope added that the reply to the HMRC Contract Review recommendation was “rather muted”, and fears the issue about low-paid PSC users appears not to have been fully grasped.

The latter point, relating to people unknowingly losing employment rights by being forced into PSCs, was further championed by Baroness Bakewell and Lord Myners.

All these three peers called for clarity from the state as to whether the Low Pay Commission will investigate the issue but Lord Newby, responding for the government in the debate, didn’t oblige.

He did however say that HMRC’s Contract Review and Business Entity Tests, both on offer to all PSC users, are “being changed very much” thanks to the review by the IR35 Forum.

New IR35 guidance, he added, was also unveiled one week ago, albeit seemingly to certain parties only, as it appears that it is yet to be published on HMRC’s website or .Gov uk.

Lord Newby then stood by the new IR35 figures; backed the rule’s continuance and told peers that their 16 recommendations were, contrary to their claims, being taken “extremely seriously.”  

“[But] there is one area where I am not going to be able to satisfy the House,” he conceded, “-- their understandable irritation at the non-attendance of the Treasury minister.”

Before he was interrupted by an angry committee member, then challenged by another, the Liberal Democrat peer tried to head-off such confrontations by touting the inquiry process as best-practice.

He said: “The fact that we’ve had a government response, however inadequate some noble Lords feel it to be, and the speed with which we’ve been able to have this debate…is a good example of your Lordships’ House scrutiny to the way we implement, or attempt to implement, public policy and I hope it will be followed more frequently.”

But Lord Newby ducked the most stinging criticisms, notably Lord Myners’, who said HMRC showed a “lack of consistency in their answers behind a degree of contentment.”  

This contentment was “ill-judged and hardly appropriate,” not least because HMT and HMRC each have “no clear policy objective” regarding PSCs, the ex-BoE director added.

Yet perhaps fittingly, it was the chair Baroness Noakes who got the last word. She said in the debate:

“The issues raised in the course of our work have not been resolved by the government so this whole area of PSCs must be regarded as unfinished business.”

After the government’s response via Lord Newby, she sounded more aggrieved -- potentially even personally. Cue some final, knock-out blows that clearly she’d kept in reserve.

Of the Treasury’s non-cooperation, the Baroness blasted: “If this practice [non-attendance] were allowed to become widespread it would be a ‘get out of jail [free] card’ for all ministers whenever they didn’t 'fancy' appearing before a Select Committee because they didn’t much like the subject matter.

“It is not the [general] practice that Treasury officials shun the committee now, and we would have been happy if Treasury officials had come to us. I think this remains an egregious example of discourtesy to the House.”

Editor's Note: UPDATE - The new IR35 guidance from HMRC (see paragraph 40) has now been unveiled.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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