Lessons from implementing IR35 reforms – Report Summary

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

Author: Committee of Public Accounts

Related inquiry: Lessons from implementing IR35 reforms

Date Published: 25 May 2022

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Summary

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.