In a report today the Public Accounts Committee today says
“widespread non-compliance” with IR35 tax reforms in central
government departments is “not acceptable” after HMRC “rushed
implementation of the reforms; provided poor guidance; and public
bodies struggled with its tool to assess status”.
The Committee says “government bodies should be best placed to
understand the rules”, which now also affect the private and
third sectors, but in 2020-21 it became clear that many central
government departments had struggled to comply with the reforms
and owed or expected to owe HM Revenue & Customs (HMRC) £263
million in back-taxes.
Many public bodies reported that the reforms caused problems for
them recruiting contractors and 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 has “done little to understand the wider impact of the
reforms on workers or labour markets”, or particular sectors, and
“underestimated the additional costs of implementing the reforms
to hiring organisations”. It claims to be unconvinced
by such evidence but has not conducted its own research,
making it “difficult to disaggregate the direct impact of the
reforms from the effects of EU Exit and the COVID-19 pandemic”.
While the reforms appear to be bringing in more tax revenue it is
“clear that structural problems remain with the way IR35
operates”:
- Hiring organisations unable to properly assess a worker’s
status
- No appeals process means it’s too difficult for workers to
challenge incorrect determinations
- 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
, Chair of the Public Accounts Committee,
said: “While workers in the gig economy have challenged
their work and tax status in the courts, there is no recourse for
workers deemed subject to IR35 tax rules despite the confusion
and non-compliance that persist even in central government
itself.
“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.”
PAC report conclusions and recommendations
-
High levels of non-compliance in central government
reflect poor implementation by HMRC and other government
bodies.Central government is spending hundreds of
millions of pounds to cover tax owed for individuals wrongly
assessed as self-employed. Government departments and agencies
owed, or expected to owe, HMRC £263 million in 2020-21 due to
incorrect administration of the rules. This is not
acceptable considering government departments should be in a
good place to understand the rules and communicate with
HMRC. However, mistakes were likely as the reforms were
rushed in by HMRC and public bodies were given little time to
prepare – in particular, they had only two months or less with
HMRC’s new guidance and tools before the new rules came into
effect. There were also problems with the guidance and Check
Employment Status for Tax (CEST) tool that HMRC provided. Some
questions within CEST were difficult to interpret correctly,
and the guidance was long, too general in scope and not
integrated into CEST itself. Employment status is a challenging
area to get right, and we are concerned that non-compliance in
the public sector may be much more widespread than the
instances HMRC has identified so far.
Recommendation: 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 in and write to us with an update in
six months’ time.
-
We are concerned that it is too difficult for workers
to challenge incorrect status determinations. The
absence of a clear definition of self-employment, and limited
access to relevant personal information for each contractor,
can make it challenging for hiring organisations to make status
determinations confidently. Hiring organisations can face
significant financial consequences if they incorrectly assess
someone as self-employed, and this risk may affect their
determinations. Workers can challenge decisions with the hiring
organisation, but they have no independent route to appeal. The
hirer must respond formally to an appeal from a contractor
within 45 days. However, if they do not change the status, the
worker has no further recourse other than to seek a refund from
HMRC by completing their self-assessment return on a
self-employed basis. It is unclear how effectively these routes
operate in practice and the extent to which they are used,
because HMRC does not monitor this.
Recommendation: 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 is not doing enough to understand the impact of
the reforms on workers and labour markets. The
complexity of the rules, and the perceived risk to hiring
organisations of failing to comply with them, may lead to
changes in behaviour by both workers and hirers. In some cases,
contractors have reported that their last clients had stopped
all use of PSCs, while some contractors have increased their
rates or avoided work if it is within scope of the IR35 rules.
Such behavioural impacts could have knock-on consequences for
workers and labour markets, such as loss of work or ability to
work flexibly. HMRC has not carried out research into these
types of wider impacts, and it is not convinced by evidence
provided by others even where this indicates there may be
significant issues. HMRC is also too dismissive where a
significant minority of people and businesses report being
adversely affected.
Recommendation: 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.
-
We are not confident that HMRC works proactively to
establish whether any sectors have been affected
disproportionately by the reforms and why. Issues in
UK supply chains have been widely reported in recent months,
for example in fuel and groceries. It is unclear to what extent
the IR35 changes may have contributed to these by affecting
hiring practices or decisions by contractors in key parts of
the workforce. Particular concerns around difficulties in
implementing the rules have also been raised by contractors in
the broadcasting and IT sectors, and these issues may be
compounded in areas that have seen changes to more flexible and
ad-hoc working practices in recent years. We do not have
confidence that HMRC is identifying which sectors may be
disproportionately affected, nor that it is working proactively
with affected sectors to understand what issues they are facing
and how these might be addressed.
Recommendation: 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. HMRC should write to us with an update in six months
with the outcome of this public engagement.
-
HMRC has not made a robust assessment of the additional
costs of implementing the reforms. HMRC states that
the IR35 reforms increased tax revenues by increasing the
number of people employed for tax purposes, but it is unclear
to what extent employment patterns have been affected by other
factors. EU Exit, the COVID-19 pandemic and other changes in
government to reduce use of contractors mean HMRC cannot be
certain to what extent the increase is due to the reforms.
There is also not a complete picture of the costs of the
reforms against which the benefits could be compared. The
government introduced the reforms because it considered it too
costly for HMRC to oversee an effective compliance regime with
each individual PSC. HMRC also concluded that hiring
organisations could administer the rules for less cost than
PSCs doing it themselves. However, HMRC’s modelling of the cost
to hiring organisations works out at just £35 a year per PSC,
based on a theoretical minimum needed to comply. HMRC does not
know what it actually costs all parts of the labour supply
chain to administer the reforms in practice.
Recommendation: 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.
-
Despite years of reforming the IR35 rules, there are
still structural problems with how they work in
practice. The IR35 rules do not work well with the
realities of contracting, both in determining workers’ tax
status and in resolving issues when mistakes have been made.
For example, hiring organisations are now responsible for
assessing tax status, but may not have access to all the
information necessary to assess the totality of a worker’s
income and other work. While HMRC interprets IR35 as applying
to individual engagements, recent court cases have focused more
on a worker’s business in the round. The legal framework and
realities of contracting also make it difficult to correct
errors if HMRC later finds a hiring organisation to be
non-compliant. Hirers often lack the data on affected workers
that HMRC would need to work out their actual tax position.
Furthermore, the legislative framework does not allow HMRC to
offset liabilities against taxes already paid, meaning it
collects tax twice on the same income and workers become able
to reclaim all the tax they paid. Ironically, the public sector
may end up paying all the tax on workers it incorrectly
assessed as self-employed. This position does not look
sustainable and risks being more costly to all parties the
longer it goes on.
Recommendation: 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
