PAC slams IR35 implementation

The Public Accounts Committee (PAC) has released a report 'Lessons from implementing IR35 reforms'. It is highly critical of HMRC and government bodies in their implementation of IR35, saying it is “not acceptable” that central government is bearing the cost of tax owed by individuals who have been wrongly assessed as self-employed.

The PAC calls on the government to answer its criticism within two months and explain the £263m that central government departments such as the Home office and DWP owe to HMRC in back taxes due to misinterpreting the IR35 rules. 

The report says that HMRC have “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 also observed that the reforms of the Off-Payroll Working rules had created recruitment problems for some public bodies. In particular, recruiting companies and contractors have reported that to avoid perceived risks of failing to comply, there was a trend to no longer engage workers through Personal Service Companies.

Conclusions and recommendations

• High levels of non-compliance in central government reflect poor implementation by HMRC and other government bodies.
  • Recommendation: HMRC should develop robust estimates of non-compliance for the public sector as a whole and use this to identify areas where they can reduce the inherent challenge of complying with the reforms, for example by improving guidance and tools. HMRC should adopt a similar approach for the private sector as the reforms bed in and write to the PAC with an update in six months’ time.
• The PAC is concerned that it is too difficult for workers to challenge incorrect status determinations.
  • Recommendation: HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. As part of this, HMRC should assess the extent to which workers are using existing appeals routes and how well they are working.
• HMRC are not doing enough to understand the impact of the reforms on workers and labour markets.
  • 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.
• The PAC is not confident that HMRC works proactively to establish whether any sectors have been affected disproportionately by the reforms and why.
  • 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 have not made a robust assessment of the additional costs of implementing the reforms.
  • 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. 
  • 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. 
    • HMRC do not end up taxing the same income twice, or unwittingly contributing to workers not paying their fair share in tax.

The committee concludes by saying that "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".

Useful guides on this topic

Personal Service Company (Tax)
What is a PSC? What are the tax implications for a PSC?  

IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?

Employment status & detailed checklist
Why is it important to check my employment status? What tests should I use? What is the recent case law?

External link

PAC report: Lessons from implementing IR35 reforms