‘IR35 putting companies off using contractors’

A lack of confidence in how to apply off payroll rules, together with HMRC’s approach when taxpayers make mistakes, is deterring companies from using contractors unnecessarily, according to a Public Accounts Committee report.

The report covers HMRC generally, and finds that HMRC’s customer service levels are at an all-time low “because of conscious choices made by HMRC and HM Treasury”.

It expresses concerns that HMRC’s approach to serious abuse is not deterring criminal activity sufficiently “while at the same time its approach to tackling IR35 is deterring legitimate economic activity”.

HMRC says that it is increasingly focusing its criminal prosecutions on the most serious cases, but the Committee says it is concerned that if fewer criminals are prosecuted this sends the wrong message. In the case of civil disputes over the application of IR35 rules, HMRC says that it has been using litigation through the courts to test the employment status rules and that it may need to update its guidance and tools on the basis of the courts’ judgements.

HMRC said that the reforms to IR35 shift the burden of determining employment status from workers to employers. The report says that, since the IR35 reforms, employers have moved between 150,000 and 200,000 workers from contractor status onto their own payroll.

It calls for data on the number of active litigation cases for IR35 and the amount of tax at risk and an assessment of the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.

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