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HMRC dismisses ‘scathing’ IR35 report, says everything is in hand

"Nothing to see here..." The HMRC IR35 response is unlikely to satisfy the PAC.

"Nothing to see here..." The HMRC IR35 response is unlikely to satisfy the PAC. (Image courtesy Paramount Pictures.)

HMRC has tried to brush off much of the criticism that IR35 from a scathing Public Accounts Committee (PAC) report, but did commit to reviewing the reality of how IR35 reforms work – at some point.

Three months on from the PAC report which described the IR35 contractor tax reforms as “rushed” and having “structural problems”, HMRC has responded to the committee’s recommendations – mostly by suggesting fixes are already in hand, or aren’t really needed.

IR35 is an attempt to prevent artificial “off-payroll” working, where contractors use personal-service companies to avoid income tax and national insurance, even while they are otherwise treated as normal employees. Faced with what it saw as high levels of non-compliance, the government changed the rules to make employers responsible for determining IR35 status, starting with the public sector in 2017, and larger private sector employers in 2021.

That move has forced what are believed to be thousands of experienced IT contractors into early retirement — or controversial and poorly regulated “umbrella” companies

PAC slaps HMRC’s IR35 approach

But according to the PAC’s report, this enforcement was rushed, with just two months’ notice given to government departments, and an inadequate online tool provided for checking a worker’s status. The report also suggested HMRC has no clear idea of the impact, true cost, or true benefit of enforcing IR35, and also has failed to provide a way for workers to challenge an incorrect assessment.

“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,” wrote the PAC in its report.

Even worse, their poor implementation may actually be costing the government money: “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.”

(For a comprehensive analysis of the PAC’s IR35 findings, Danny Batey, a senior tax consultant at Markel Tax, went through the committee’s report in detail last month.)

Problem? What problem?

The PAC report described HMRC as being “too dismissive” about concerns, and is “not convinced by evidence provided by others” – and this pattern seems to hold true in the department’s responses to the report. While HMRC said it accepted all six recommendations from the PAC, the wording of its responses suggests this acceptance is not complete.

For the PAC’s first recommendation – that HMRC should “develop robust estimates of non- compliance for the public sector” – which HMRC nominally accepted, the department went on to say: “HMRC agrees there is value in building on this [customer education] foundation and is committed to continuing to support customers with compliance. However, it does not agree that developing an overall estimate of non-compliance is the best way to achieve this outcome.”

Instead, it said, it will “expand its work to obtain customer insight”, “build on existing engagement” and “consider what additional customer support is required”.

For the PAC’s second recommendation – that HMRC should make sure there is a “fast and independent process for contractors to resolve disputes over status determinations”, HMRC’s response merely summarises its “established” appeals routes, and says it will “monitor” the number of disputes, and publish ongoing research into the impacts of the 2021 reforms.

See also: HMRC is teeing up its £4.5 billion “DALAS” framework, views welcomed

Similarly HMRC doesn’t believe it needs to conduct any more research into the impact of IR35 – it’s already done plenty, apparently – and also thinks its education activities are adequate, although it will “develop and implement a stakeholder engagement strategy”. It also said it was already working on a cost-benefit analysis using its “well-established methodology” – the same methodology which suggested IR35 implementation would add just £35 a year to the cost of a contractor.

The single clear commitment HMRC made was to a review of how the IR35 system is working in reality, compared to the Platonic ideal of how it was designed on paper – specifically as regards workers paying tax twice. Again, though, the department suggested it was already working on this.

“HMRC has already set up a working group with external stakeholders to consider whether a legislative solution can be found to allow HMRC to take account of taxes that have already been paid by workers and intermediaries, ensuring that HMRC does not tax the same income twice and that workers pay a share of the tax liability. HMRC will continue with this work.

“HMRC will notify the Committee of a target implementation date for meeting this recommendation as soon as this work has concluded,” added the department’s response.

In his writeup of the PAC report last month, Batey said: “If HMRC’s past track record of engagement, following previous PAC reviews, and the comprehensive House of Lords report on the off-payroll legislation is anything to go by, positive change seems unlikely.”

Given HMRC’s dismissive tone to the PAC in this response, Batey’s prediction seems to have been borne out. But with a government strapped for cash, and a new prime minister and (presumably) chancellor at the reins, perhaps more comprehensive IR35 reform is not impossible.

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