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Houses of Parliament, Westminster,
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Widespread IR35 non-compliance persists, say MPs

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IR35 off-payroll working reforms have come under fire this week after both the ICAEW and the Public Accounts Committee have criticised fundamental problems still remaining with the tax rules. 

25th May 2022
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“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.”

That is the assessment of IR35 from the chair of the Public Accounts Committee (PAC), Meg Hillier, following a new scathing report that explores the structural problems that still 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,” concluded the lessons from implementing IR35 reforms report. 

The PAC report also found that “a lack of good data and legislative provisions in cases of non-compliance has meant that HMRC ends up taxing the same income twice.”

The MPs explained that this is a concern in the public sector because “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.”

Non-compliance in central government

The PAC took aim at HMRC for rushing the implementation of the reforms and providing poor guidance, and used the example of “widespread non-compliance” in central government as an example that even those “best placed to understand the rules” didn’t. 

“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,” said the report.  

As AccountingWEB reported last summer, HM Courts & Tribunals Service (HMCTS), the Department of Work and Pensions (DWP) and the Home Office owed HMRC millions in IR35 back taxes. The PAC expects the combined total of central government IR35 miscalculation to be £263m in 2020-21. 

Public bodies have also struggled with recruiting problems due to rising pay rates, said the MPs. 

Restricting or removing fiscal incentive

Before the publication of the PAC report, the Institute of Chartered Accountants in England and Wales (ICAEW) got off the mark first this week and highlighted fundamental problems around the taxation of IR35. 

The tax faculty, however, has offered a solution to the ongoing difficulties in the implementation of the rules. It’s concluded that the only way to resolve the underlying fundamental taxation issues is to reduce or remove the incentives to arbitrage employment status.  

The Tax Faculty explained that this can be achieved if “the total amount of tax and NIC payable by individuals and the engagers of workers was the same, or more closely aligned, across all sources of income,” adding: “They should not vary depending on employment status or the type of engagement.”

But the Tax Faculty recognised that questions into whether “genuinely” self-employed should have reduced tax/NIC bills requires a national debate. 

PAC recommends

Meanwhile, the MPs also had some specific actions for HMRC, from conducting research into the impacts of IR35 to presenting a cost-benefit analysis on the reforms.

As the PAC’s Hillier set out, “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.”

The group’s conclusions called into question HMRC’s implementation of the rules, with the MPs challenging the tax authority’s appetite to proactively identify sectors affected disproportionately by the reforms.

As part of the long list of recommendations landing at HMRC’s door, the PAC concluded that:

  • The tax department is “too dismissive where a significant minority of people and businesses report being adversely affected” and urged them to conduct and publish specific research into the impacts of the IR35 reforms on contractors and the labour market. 
  • The Check Employment Status for Tax (CEST) tool was “difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself”.
  • Non-compliance may be more widespread than what HMRC has identified, and the tax authority should develop robust estimates of non-compliance for the public sector and take a similar approach for the private sector as the reforms bed in. 
  • Following concerns that it’s difficult to challenge incorrect status determinations, HMRC should have a “fast and independent process for contractors” and look at the effectiveness of existing appeal routes.
  • There are still structural problems with the IR35 rules and HMRC should review how the system is working and whether it can be made more efficient and effective.
  • HMRC cannot be certain that the IR35 reforms have increased tax revenues as other factors such as Brexit and Covid-19 could also have reduced the use of contractors. 
  • HMRC should produce a cost-benefit analysis as there are questions over the actual costs of compliance, hiring organisations, workers, and others in the supply chain. 

In the closing remarks of the report’s summary, the group of MPs called on the tax department to demonstrate the system can “operate effectively and fairly in the real world” and “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”.

HMRC responds

Responding to the report, an HMRC spokesperson welcomed the PAC’s acknowledgement that the reforms appear to be bringing in more tax revenue.  

“These reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees, levelling the playing field for everybody else and bringing in the tax that is due under the law.

“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.”

Replies (16)

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ghm
By TaxTeddy
25th May 2022 09:09

The PAC says HMRC is “too dismissive where a significant minority of people and businesses report being adversely affected”. Now where have I heard that before? MTDIT anyone?

Thanks (6)
By ireallyshouldknowthisbut
25th May 2022 10:29

Or in summary "the rules make it impossible to work out who is or who is not caught by IR35"

This has been the case since it was introduced. No amount of tu_rd polishing will help, the rules are fundamentally impossible to refine and make work in a clear and unambiguous manner.

They need to go back to the basics of "what system do we want?" and "how can we make it work in practice?"

We might do better with arbitrary rules that can be danced around than miles and miles of grey wool. For example "if you work for more than 12 (or 6) months full time for the same business you are an employee". of course in practice it gets tricky to draw up those rules as they have not managed it for the 20+ years its been in place, but some simple ones are needed, not layers and layers or more rules to try and catch things falling the 'wrong' side of the others ones. Big red pen, and start again with a blank sheet of paper.

Thanks (4)
Replying to ireallyshouldknowthisbut:
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By Justin Bryant
25th May 2022 11:03

Yes. As I said here:

"HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501 shows that no-one has understood this legislation properly for over 20 years, as stated by me here:

https://www.accountingweb.co.uk/any-answers/reasonably-interesting-ir35-...

If experienced FTT & UT judges and HMRC cannot apply the IR35 tests correctly, how can we or our clients do so?"

https://www.accountingweb.co.uk/tax/personal-tax/hmrc-scores-a-win-and-a...

Thanks (5)
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By Hugo Fair
25th May 2022 10:36

The PAC report does indeed contain some cut'n'paste paragraphs that will come in handy when they review the first few years of MTDforIT:

"After years of fiddling with these reforms and with central government spending hundreds of millions of pounds .. 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."

Thanks (3)
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By Paul Crowley
25th May 2022 14:23

Simple
Get rid of NIC and change tax rates

Thanks (8)
paddle steamer
By DJKL
25th May 2022 15:33

Create a new legal entity type that has its own tax and accounting rules and where changes in rates of tax can be specially applied to the entity type at any budget, ensure this beast is slightly favourable to employers compared with straight employment re employment rights etc but has a slightly lower tax rate than employment. HMG can aim it squarely at the market it needs to serve.

Stop trying to cram 21st century work practices into containers they just do not fit.

This is an occasion when reinventing the wheel would probably be a good idea.

Thanks (1)
Replying to DJKL:
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By Paul Crowley
25th May 2022 16:05

And it would be a cheaper solution than spending 20 years trying to bend the rules in a way that HMRC just cannot get to grips with

Called by HMRC 'I cannot believe it not "the position of total servitude" Ltd'

Thanks (0)
Replying to Paul Crowley:
paddle steamer
By DJKL
25th May 2022 16:13

I agree- I just cannot understand why there is not room for a brand new style entity, we should review messy arrangements that cause misery and chaos and tidy them, make things simple for those contracting and those wishing to hire, if all parties could safely just get on with creating what they create (be it software, whatever) UK GDP would actually likely grow (though there might be an initial lull amongst accountants)

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Replying to DJKL:
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By Hugo Fair
25th May 2022 16:53

Ah so that's what MTD is for ... to keep the accountants busy whilst HMRC launch this 'new entity' (and the associated tax reforms)? I wish!

Thanks (1)
Replying to DJKL:
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By johnjenkins
26th May 2022 10:28

You don't need a new "entity" that's where the EU went wrong in inventing a "worker".
What we need is HMRC to understand employment status is a commercial thing not a tax thing. Until then we will have to put up with uncertainty.

Thanks (1)
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By PChapman
26th May 2022 11:31

IR35 is not and never has been fit for purpose!

IMHO what is needed is

Scrap IR35 - there should be only one set of rules as to a persons employment status.

Review the tax rules so that there is parity between self employment and single person Ltd co. A businesses legal structure should not be driven by tax as it has been this last 20+ years

Of course this won't happen as the tax take from a pseudo employee under IR35 is much higher!

Thanks (2)
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By dmmarler
26th May 2022 12:08

Paul Crowley and the Tax Faculty are right - the taxation of the different types of income should be the same in terms of both tax and National Insurance paid. If we just got rid of NICs and adjusted income tax, then the whole of IR35 can disappear as there would no longer be an incentive. These are contracts entered into for a commercial purposes, not to pay less tax. If we get rid of NICs, we get rid of a whole raft of civil servants and their pensions and considerable establishment costs - saving money for UK plc. (Why are some people talking about different legal entities - this just costs money!) The thought of HMRC being in charge of an appeal system for people who have been wrongly classified as IR35 just beggars belief. We need to simplify and use the structure we have.

Thanks (2)
Replying to dmmarler:
paddle steamer
By DJKL
30th May 2022 13:53

Scrapping NIC and adding it to IT either increases massively the tax on pensions, rentals etc, with all the electoral ramifications re same, or writes a new raft of legislation describing what/who does not fall to be charged at this new IT rate.

We already to a degree have this in Scotland with different IT rates for say employment and for bank interest received.

I still think a targeted tax/accounts approach , with new taxes with different rates is the way to go (a bit like professional contracting in Germany but ignoring the lower tax approach if one does not attend church)

Thanks (0)
Replying to DJKL:
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By dmmarler
31st May 2022 14:25

Yes, I am saying simplify tax so there is just income tax for individuals. If you want to get more pensioners out of income tax, just increase the personal allowance for those over 67 (or whatever). Otherwise why bother with different rates for different taxes? It just becomes expensive to collect and more difficult for the average person to comprehend. The additional income tax for Scotland and Wales is yet another complication we could do without; someone will soon realise it is not working to their advantage and there will be complaints.

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By schocca
26th May 2022 12:36

IR35 issues (with employment status/rights/benefits) have been performing as I predicted for the last 20+ years since they introduced it.

- It's all about Employer NIC + hiding from employees the real rate of PAYE tax once employee NIC is taken into account.

The government needs to bite the bullet and normalise this across contractor/employee rates + also allow contractors to claim back their expenses (including travel). Otherwise it will never work.

On the other hand, the increase in dividend rates does move personal companies closer to employee tax rates... (assuming the contractors pay themselves the full income stream) - but the noise has taken this beyond all ability to return back to a normal conversation.

On another point, I was recently called by a head hunter trying to find an experienced tech engineer for a city contract - inside IR35 + umbrella + 9 month contract - the asking rate was significantly too low.
- I was blunt in my response -> 50% rate increase for inside IR35 and 100% rate increase for the umbrella risk.
- The employer was also trying to push the employer NIC onto the umbrella (so the post tax income was essentially 40% of quoted rate!!)

The umbrella is the issue here - for high rate contracts, the risk of the umbrella getting it wrong/fraud and landing the contractor with a massive HMRC bill + fines makes the whole thing a massive risk. Not worth it.

And the other issue is that the CEST tool IS ignored by HMRC / tribunals - so no change re assessment of the Ir35 in/out status apart from the contractor being unable to get it fixed - utter shameful behaviour by HMRC/government in all of this.

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By Beef curtains
26th May 2022 15:12

Just get rid of the bloody nonsense. The very fact that Brown and Primarolo gives enough reason.

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