Government must take action to clean up the ‘Wild West’ supply chain that exploits freelance and contract workers and encourages tax avoidance schemes, the Loan Charge APPG has said.

The All-Party Parliamentary Group inquiry, How Contracting Should Work, which commenced in December, has examined how professional contract and freelance working should operate, be remunerated and taxed fairly and appropriately and also to prevent tax avoidance schemes being promoted or even existing at all.

The inquiry also shows the link between what it describes as “the flawed IR35 legislation” and the subsequent off-payroll working rules and the operation and use, often unwittingly, of so-called ‘disguised remuneration’.

Following the roll-out of IR35 reform on 6 April, medium-sized and large businesses have now become responsible for determining the IR35 status of contractors they engage, with the fee-paying party now carrying the risk for incorrect assessments.

The changes resemble those enforced in the public sector in 2017, which saw all public sector organisations tasked with assessing IR35 status.

The APPG says this legislation and the recent roll-out to the private sector has led to the “increased proliferation and use of umbrella companies and related arrangements (some of which have then involved so-called ‘disguised remuneration’ schemes)”.

The APPG is calling on the government to amend the off-payroll working rules, address these during the passage of this year’s Finance Bill and for the Treasury and HMRC to consider how best to stamp out the abusive practices outlined in this report. Part of this, it says, should be legislating that “inside IR35” workers should get full rights under all legislation dealing with agency workers, with a clear and transparent right to holiday and sick pay.

The APPG is calling on the government to address these issues, as part of its promised review into supporting self-employment. It says this review must examine professional contract and freelance working, to come up with the best way of organising, remunerating and taxing this important and increasingly commonplace way of working. This should build on the recommendations in the Taylor Review, an independent review of modern working practices, but also look at suggestions for different forms of company or tax status for freelance and contract workers, to come up with the best way for this important way of working to be organised. The group says this must also adopt the principle that it is unfair to have workers who are taxed as employees without having any of the rights or benefits of an employee or any recognition in employment law. It urges the government to align tax and employment law, providing certainty for contractors and engagers, and also to ensure that anyone who is taxed as an employee receives the corresponding benefits.

The Loan Charge APPG report concludes by calling on the government to follow-up the Taylor Review and to examine the best possible ways to organise and structure contracting and freelancing.

The report and its recommendations will be sent to Treasury Ministers, and the APPG is urging the government to act in the forthcoming Finance Bill, in order to deal with these many issues, including amending the off-payroll rules to stop non-compliant practices by payroll intermediaries.

Ruth Cadbury MP, Co-Chair of the Loan Charge APPG (Labour) said:

“The Loan Charge APPG are pleased to publish our report on ‘How Contracting Should Work’, which builds on previous work looking at self-employment and focuses on the specific issues regarding professional contracting and freelance working. It is clear from our Inquiry that there is significant non-compliance in the worryingly opaque supply chain, which has been dubbed ‘the Wild West’ as a result and the lack of regulation enables exploitative practices, as well as enabling promoters of tax avoidance schemes to operate.

“If it is serious about clamping down on tax avoidance schemes, the government must legislate to clean up the supply chain and proactively stop schemes as they start, rather than merely trying to take retrospective action after the event. We also call on the government to commence the review they promised to look at all these issues and how best to recognise and structure contracting and freelancing.”

Baroness Kramer, Vice-Chair of the Loan Charge APPG (Liberal Democrat), said:

“The Loan Charge APPG report shows the confusion as to how professional contract and freelance workers are supposed to operate. This has been driven to a great extent by the deeply flawed ‘IR35’ legislation and the associated off-payroll working rules. We urge the government to finally accept the problems these have caused and the fact that this has led to the proliferation of umbrella companies, which has then opened the door to rogue providers and the mis-selling of tax avoidance schemes. This should happen in the forthcoming Finance Bill, to scrap or at least amend the off-payroll rules to tackle bad practice in the supply chain and to ensure that anyone who is taxed as an employee, receives genuine employee rights and benefits.

“We also call on the government to announce the review into self-employment that they promised, so that rather than constantly penalising contract and freelance workers, we move to a proper system of recognition and structuring of this important way of working, which is increasingly commonplace and important to the economy.”

Owen Thompson MP, Vice-Chair of the Loan Charge APPG (SNP), said:

“The Loan Charge APPG report exposes very worrying practices in the contracting sector, on the part of some umbrella companies and recruitment agencies. It is clear that this has led directly to dodgy providers entering the market and mis-selling tax avoidance schemes. As ever, and as with the Loan Charge, it’s the individual contractors, not the promoters of the schemes, who get penalised. The government needs to act to stamp out schemes as they appear, starting with regulating the sector, to freeze out rogue providers and enforce good practice.

“It is also extraordinary that HMRC are already sitting on data that if matched up, would allow them to shut down ‘disguised remuneration’ schemes, but don’t do this. We urge HMRC to do this and to properly work with compliant providers and reputable sector organisations to stop the ongoing mis-selling of tax avoidance schemes which continue to ruin lives.”