The Public Accounts Committee (PAC) has published a negative report into the Government’s approach and implementation of IR35 reforms. Here, Dave Chaplin, CEO of IR35 Shield gives his assessment:
The Public Accounts Committee (PAC) report (“Lessons from implementing IR35 reforms”: https://committees.parliament.uk/publications/22345/documents/165286/default/) contains damning criticism of the implementation, drawing attention to “widespread non-compliance” with IR35 tax reforms in central government departments as “not acceptable” after HMRC “rushed implementation of the reforms; provided poor guidance; and public bodies struggled with its tool to assess status”.
The Committee found that many public bodies reported that the reforms caused problems for them when recruiting contractors. Some contractors report that, to avoid any risks of failing to comply, their clients changed hiring practices and opted to no longer engage workers through their own limited companies.
The report was critical of the design of the legislation and stated that it is “clear that structural problems remain with the way IR35 operates”, highlighting three key areas: hiring organisations are unable to properly assess a worker’s status, no appeals process means it is too difficult for workers to challenge incorrect determinations, and a lack of good data and legislative provisions has seen HMRC taxing the same income twice: a particular concern in the public sector where government can end up subsidising private sector contractors for all of their tax.
The Committee recommended that:
“HMRC should develop robust estimates of non-compliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools. It should adopt a similar approach for the private sector as the reforms bed.
“HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. As part of this, it should assess the extent to which workers are using existing appeals routes, and how well they are working.
“HMRC should conduct and publish specific research into the impacts of the IR35 reforms on contractors and labour markets, to check it is being applied as intended and not adversely affecting employment opportunities.
“HMRC should proactively identify and work with sectors that have been particularly affected to understand the challenges, establish how to address them and make it easier to comply.
“In light of actual experience, HMRC should produce and present to Parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain.
“HMRC should review how the system is working and whether it can be made more efficient and effective. In particular, it should develop solutions to address problems with how the IR35 rules work in practice, including ensuring that HMRC has the data it needs to accurately reflect each worker’s tax position in cases of non-compliance; and HMRC does not end up taxing the same income twice, or unwittingly contributing to workers not paying their fair share in tax”.
The Public Accounts Committee is spot on with its observations and recommendations, demonstrating that it was ill-conceived to extend the legislation to the private sector from April 2021. Neither the Government nor HMRC are in the habit of admitting when they have made a mistake but this damning report by the Public Accounts Committee should make them all sit up and listen. HMRC and the policymakers ploughed full steam ahead into rolling out the off-payroll reforms to the public sector in 2017 and over the last year or so we have seen a car crash, a massive pile-up some might say, as even government departments have got it wrong.
Firms are struggling to get status determinations right, and CEST is proving to be dangerous for firms – a hindrance, not a help. The disproportionate tax risk and double taxation issue has still not been resolved, and neither is there any independent appeals process for contractors who are not being treated fairly.
At the same time, HMRC is entrenched in costly litigation in the Atholl House case to try and get clarity in the law, where Kaye Adams is facing her fourth and very costly tax tribunal. Personally, I don’t think the Government should be relying on a 59-year-old woman who presents a daytime celebrity chat show to provide the funding to shape how our tax laws are shaped. Maybe Parliament could stop focusing on how much booze the PM drinks and intervene to stop this madness created by HMRC.
Over the last 20+ years there has been considerable misjudged and damaging legislation heaped on the contracting sector and the sensible option would be to go back to the drawing board and design a fair tax system that works fairly for everybody.
PAC is clearly not impressed with the handling of the off-payroll implementation and Dame Meg Hillier MP, Chair of the Public Accounts Committee summed it up well saying: “After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labour market.”
It begs the question: will HMRC listen?
