Report by Committee of Public Accounts is "damning indictment of the IR35 rules", says IPSE

Report by Committee of Public Accounts is “damning indictment of the IR35 rules”, says IPSE

In a report (25th May 2022) by the Committee of Public Accounts entitled ‘Lessons from implementing IR35 reforms’, HMRC is accused of having “done little to understand the wider impact of the reforms on workers or labour markets”. Keep reading as we summarise the report and share IPSE’s views on the “damning indictment of the IR35 rules”.

The official report acknowledges the changes in legislation generated “more tax revenue”, but issues remain surrounding IR35 and how it “operates in practice”. The report summary states:

“In 2017, the government reformed the tax rules for off-payroll working in the public sector (commonly known as IR35). The reforms made central government departments responsible for assessing the tax status of their contractors in order to address tax avoidance. In 2020–21, it became clear that many central government departments had struggled to comply with the reforms and therefore owed or expected to owe HM Revenue & Customs (HMRC) £263 million in back-taxes in 2020–21. Such widespread non-compliance is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC. However, the compliance issues were also compounded as HMRC rushed implementation of the reforms; provided poor guidance; and public bodies struggled with its tool to assess status.

Many public bodies report that the reforms have caused problems for them recruiting contractors due to rising pay rates. As the reforms now affect the private and third sectors, it is worrying that HMRC has so far done little to understand the wider impact of the reforms on workers or labour markets or investigated whether any sectors are particularly affected. Some contractors report 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. HMRC is 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.

While the reforms appear to be bringing in more tax revenue, it is also clear that structural problems remain with the way IR35 operates in practice. Hiring organisations cannot always get all the information needed to accurately assess a worker’s status, and it is 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. 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. HMRC needs to demonstrate 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.”

Several conclusions and recommendations are made in the report, including:

  • There is a lot of non-compliance in central government highlight the poor role out of the IR35 reforms by HMRC and other bodies.
  • It is difficult for temporary workers to query IR35 assessments (incorrect status determinations by end-hirers).
  • HMRC is no trying hard enough to understand the impacts of the reform on the marketplace.
  • The Committee of Public Accounts isn’t confident that HMRC is working proactively to understand if specific sectors have been more impacted than others, and understand the reasons why.
  • The associated costs of the reform went under the radar.
  • Large problems remain – “structural problems”.

You can read the full report here.

Andy Chamberlain, the Director of Policy at IPSE (The Association of Independent Professionals and the Self-Employed), shared his views on the report. He said:

“[The] report is a damning indictment of the IR35 rules. It shows that the flawed reforms have had devastating consequences for hirers and self-employed workers alike, with thousands of self-employed workers losing public sector contracts since the changes to off-payroll work in 2017, while government departments have been left shouldering huge tax bills.

The report has also shown that too many hirers are making incorrect IR35 determinations. Employment status rules are notoriously complex for organisations to understand, and it is still far too difficult for workers to challenge incorrect determinations as there is no independent appeals process.

We at IPSE hope that the report jolts the government into action. It is clear the rules urgently need a rethink. The damage of the reforms to the public sector is just the tip of the iceberg – the much larger private sector is also really struggling with this. The rules are far too confusing, are causing major conflicts within the labour market, which is preventing projects from being done and, in turn, damaging the UK economy.”

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