“Damning” report highlights IR35 non-compliance in public sector

An MP-led report has highlighted the failure of public sector bodies to comply with IR35 tax reforms, claiming that the UK government owes itself hundreds of millions of pounds in taxes.

Published Wednesday morning, the Public Accountants Committee report states that government departments and agencies owed – or were expected to owe – HMRC £236m in 2020-21 due to the “incorrect administration of the rules”.

The Committee went on to argue that this non-compliance is “not acceptable”, and that the government “should be in a good place” to understand its own rules.

Similar sentiments were shared by Seb Maley, CEO of IR35 insurance provider Qdos, who said the report highlighted “many of the government’s failures” and called into question the “true impact” of IR35 reform on the labour market.

“HMRC has said the changes are generating more tax revenue, but this isn’t necessarily a sign of improved compliance. In our experience, it’s a direct result of genuine contractors being forced to operate on the payroll,” Maley said in an email.

The government originally introduced the IR35 off-payroll working rules in April 2000, with the objective to prevent tax avoidance by ‘disguised employees’ providing services through an intermediary such as a personal services company (PSC).

In April 2017, the UK government sought to tighten the rules for the public sector. While contractors were previously responsible for determining their own IR35 status, the change meant that the compliance burden shifted further up the supply chain to the end client.

But according to the Committee’s report, the “rushed implementation” of the reforms by HMRC compounded the compliance issues in the public sector and meant that “mistakes were likely”.

The report also noted that there were 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,” the report said.

The report went on to recommend that, as a solution, HMRC should develop “robust estimates” of non-compliance for the public sector. This can be used to identify areas where compliance challenges can be alleviated, including improving its guidance and tools, it said.

Qdos’ Maley agrees with  Committee’s view, arguing that CEST “frankly still isn’t fit for purpose despite being launched five years ago”.

“Structural problems remain”

The report also looks beyond the public sector and argues that HMRC lacks an understanding of the wider impact of the IR35 reforms on the labour market.

“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,” according to the report.

“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.”

The Committee recommend that HMRC carry out research to ensure that the labour market is not being hindered by the IR35 reforms.

“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.”

Other recommendations in the report include: Bolstering the dispute resolution process; working with hard-hit sectors to better understand the challenges; producing a cost-benefit analysis of the forms; and reviewing the system as a whole to ensure it is working.

But according to HMRC, the IR35 reforms have had the intented effect of reducing avoidance and “levelling the playing field”.

“These reforms have succeded in making the tax system fairer, with more poeple who work like employees paying tax like employees,” a spokesperson said.

“We delivered an extensive programme of education and support before the reforms took effect and we have continued to adapt our approach to improve compliance with the rules and support organisations to get things right.”