Report criticises handling of IR35 roll-out

A report on the implementation of IR35 tax legislation roll out has raised concerns at HMRC’s failure to research the wider impact of the reforms on workers or labour markets and to investigate whether any sectors are particularly affected.

The report by Parliament’s Public Accounts Committee is calling for HMRC to  demonstrate that the system “can operate effectively and fairly in the real world, and investigate whether the costs and unintended consequences are proportionate to the additional tax revenue which the reforms raise”.

IR35 reforms came in in 2017 with central government departments becoming responsible for assessing the tax status of their contractors in order to address tax avoidance.

However, the PAC says it became clear that many central government departments had struggled to comply with the reforms and therefore owed or expected to owe HMRC £263 million in back-taxes in 2020–21. It states: “Such widespread non-compliance is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC.”

Those issues were compounded, says the report, when HMRC “rushed implementation of the reforms; provided poor guidance; and public bodies struggled with its tool to assess status”.

The report says many public bodies report that the reforms have caused problems for them recruiting contractors due to rising pay rates. The reforms have now been rolled out to the private and third sectors, with some contractors reporting that, to avoid perceived risks of failing to comply, their clients are changing hiring practices, such as no longer engaging workers through personal service companies.

The PAC says HMRC appears unconvinced by such evidence, but has not conducted its own research with contractors. “The lack of data has made it difficult to disaggregate the direct impact of the reforms from other labour trends such as the effects of EU Exit and the Covid-19 pandemic. Furthermore, HMRC underestimated the additional costs of implementing the reforms to hiring organisations,” says the PAC.

It says structural problems remain with the way IR35 operates in practice. For instance, hiring organisations cannot always get all the information needed to accurately assess a worker’s status. The report says it is also too difficult for workers to challenge incorrect determinations as there is no independent appeals process. A lack of good data and legislative provisions in cases of non-compliance has also meant that HMRC ends up taxing the same income twice. The report notes that this is of particular concern in the public sector where, if workers or their personal service companies reclaim the taxes they already paid, the government could end up subsidising private sector contractors for all of their tax.

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