Public Accounts Committee publishes scathing review of IR35 reform

Government urged to address fundamental problems that continue to plague IR35

A group of cross-party MPs have urged the government to solve a number of problems resulting from the introduction of IR35 reform, in a scathing report published by the Public Accounts Committee (PAC). 

Following a comprehensive review of changes to IR35, the PAC outlined its recommendations and concerns in ‘Lessons from implementing IR35 reforms’ – a comprehensive document that exposes many of the mistakes made by the government and HMRC prior to and following the rollout of IR35 reform. 

It focuses on the fact that government bodies – who the PAC says “should be best placed to understand the rules” – owe HMRC a staggering £263m due to non-compliance, also criticising HMRC for doing “little to understand the wider impact of the reforms on workers or labour markets”. The PAC concluded that despite the introduction of these changes, “the fundamental problems underlying UK taxation of work remain.”

We focus on the details in this article…

HMRC’s IR35 guidance called into question

The PAC pointed toward the mistakes made by various government departments when implementing IR35 reform, which resulted in £263m worth of IR35 bills. The report states that such “high levels of non-compliance in central government reflect poor implementation by HMRC and other government bodies”, describing it as “not acceptable.”

As a result, HMRC was encouraged to “develop robust estimates” for non-compliance in the entire public sector, using them as a basis for the level of support required to ensure compliance across the board. The PAC said the tax office should approach private sector reform in a similar manner in six months’ time when the changes have fully bedded in.

Fresh concerns raised over CEST

HMRC’s IR35 tool (CEST) has many critics, with the PAC being one of them. Citing “problems” with the tax office’s IR35 technology, the committee said some of CEST’s questions were “difficult to interpret correctly”, with the guidance “too long”, “too general in scope” and not integrated into CEST itself. And while sensitive to the fact that IR35 status can be challenging to get right, this report makes the connection between non-compliance in the public sector and the use of this controversial tool. 

Contractors struggle to overturn wrong IR35 decisions

The report makes clear that without any independent appeals process in place, contractors have little prospect of successfully challenging an incorrect IR35 determination made by their client. Under the existing rules, should a contractor launch an appeal, the client must respond within 45 days, but if the client disagrees with the contractor’s stance there’s no independent route of appeal. 

This has become a major issue since the introduction of IR35 reform, with some more risk-averse businesses placing all contractors inside IR35 or insisting they operate via umbrella companies irrespective of contractors’ true status. Acknowledging this, the PAC called for a “fast and independent process for contractors to resolve disputes over status determinations.”

Wider impact of IR35 unexplored 

HMRC was criticised for “not doing enough” to gauge the true impact of IR35 reform on workers and labour markets. This was largely in reference to some businesses stopping in engaging contractors altogether due to reform – a trend which has seen entire contractor workforces given no other option but to operate under PAYE or have their contract cancelled. 

The committee said the tax office hasn’t carried out enough research into these wider impacts, doesn’t acknowledge evidence provided by others that shows it’s a significant issue and hasn’t established whether specific sectors have been worse affected than others.

HMRC was urged to conduct and publish specific research into how reform has affected contractors and the labour market – to ensure the changes are being “applied as intended and not adversely affecting employment opportunities.” As part of this, the tax office was told to identify industries that need sector-specific help and provide an update in six months' time.

HMRC yet to provide cost of IR35 reform

The tax office has previously claimed that IR35 reform has generated an additional £440m in tax revenue in the public sector alone – although it should be noted that this isn’t necessarily evidence of increased compliance, given many contractors have been wrongly assessed as inside IR35. 

Even so, PAC stated that they are yet to see a complete picture of the cost of the reform. With this in mind, HMRC should present an actual “cost-benefit analysis” of the changes to Parliament, exploring the cost of compliance to HMRC itself, businesses, contractors and other parties in the supply chain. 

IR35 legislation’s structural problems remain 

The report pulls no punches when focusing on the IR35 legislation’s “structural problems”, which remain despite IR35 reform. From highlighting that businesses rarely have the information they need to accurately determine IR35 status to HMRC not offsetting tax already paid by a contractor should they find a business non-compliant, the legislation “does not look sustainable” as things stand, the PAC claimed. To start, HMRC has been encouraged to review how the system is working, explore ways it could be improved and stop taxing the same income twice.

In summary, this report shines a light on many of the unintended consequences resulting from IR35 reform, along with the areas in which the government could improve. For contractors who have found themselves unfairly placed inside IR35 and businesses still struggling to get to grips with the changes, the PAC’s findings will be welcomed. But how receptive the government will be to these recommendations remains to be seen. 

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