HM Revenue & Customs (HMRC) will review IR35 off-payroll implementing legislation in response to claims by the Public Accounts Committee (PAC) that there are “structural issues” that need to be addressed in terms of how tax avoidance rules work in the public sector.
Several months have passed since the PAC published its damning report on the damage caused by the introduction of IR35 reforms to the public sector in April 2017, which concluded that HMRC’s “rushed implementation” of the changes had led to “widespread non-compliance”.
As proof of this, the committee pointed to the list of government departments – which include Department of Work and PensionsThe home office And Ministry of Justice – which ended up owing hundreds of millions of pounds in unpaid tax to HMRC for making IR35 compliance errors.
The reforms, introduced by HMRC as part of an ongoing clampdown on phony employment, were first introduced in the public sector in April 2017, before being extended to the private sector in April 2021.
Before the changes came into effect, limited company contractors were responsible for determining whether work they did for their end-clients was taxed in the same way as permanent employees (within IR35) or off-payroll employees (outside IR35). . )
According to HMRC, this system of self-classification has resulted in some contractors deliberately misclassifying themselves as working outside IR35 in an attempt to reduce their employment tax liability.
HMRC has now published its response to the PAC’s findings, which found the tax collection agency committed to acting on a number of recommendations made by the committee to improve compliance with the reforms. As such, HMRC has agreed to further research the impact of the reforms by building closer relationships with contracting stakeholders and government department compliance heads, and “consider” what additional customer support it can offer for end-hirers grappling with the changes.
Cost benefit analysis
HMRC also agreed to revise its processes for contractors who have reason to challenge their IR35 status determination and committed to sharing details of the cost-benefit analysis of the reforms with the committee. All these commitments have a confirmed implementation date of December 2023.
However, it is likely that what HMRC has agreed to do is to respond to the PAC’s recommendation that it review how the IR35 rules are working, and address a number of issues with how they work in practice.
“Including ensuring that HMRC has the necessary data to accurately reflect each worker’s tax position in practice; And HMRC does not tax the same income twice or inadvertently contribute to workers not paying their fair share of tax,” the PAC recommendation said.
HMRC has come under fire for failing to notify contractors in February 2022 that they could miss out on reclaiming tax they have already paid if the public sector body they are involved in gets IR35 rules wrong.
This is because, when calculating the amount of tax owed by a non-compliant public sector organisation, HMRC is failing to take into account the amount of corporate tax or value added tax already paid by contractors working for these organisations.
As a result, HMRC has found itself accused of collecting excess tax, a claim it has repeatedly denied, saying it “only collects what is due in law and, as such, HMRC collects the correct amount of tax. The law when collecting it”.
In response to the PAC’s recommendations, HMRC said it already has a process in place to notify contractors that they are entitled to claim back any tax overpaid in such instances, and said it would continue to review how it works. Practice to make sure it is “as effective as possible”.
It added: “HMRC need relevant information from the client organization to enable them to manage the process, as they are the ones who employ the worker. HMRC is seeking the necessary information from client organizations at the start of a compliance investigation to increase the likelihood of obtaining relevant data. HMRC will continue to review this process to ensure it works as effectively as possible.”
Elsewhere, HMRC has also confirmed it has established a working group with external stakeholders to consider whether a legislative solution can be found so the department can take account of tax already paid by contractors.
“[This will ensure] HMRC does not tax the same income twice and workers pay a share of the tax liability,” it said. “HMRC will continue to do this.”
However, there is no target implementation date shared by HMRC for this recommendation.
Dave Chaplin, CEO of contractor compliance consultancy IR35 Shield, said that HMRC’s reliance on notification procedures where over-collection of tax is concerned is inadequate and legislation is needed to address this. “In my view, it is not strong enough; There should be a statutory requirement for HMRC to identify and process refunds,” he said. “If HMRC fails to do so, the ‘fee-payer’s’ bill should be reduced by the amount of tax paid.
“It is encouraging to read that HMRC is actively looking to tackle the offset problem, as currently a firm is unfairly forced to foot the full tax bill, and the contractor pays nothing,” said Chaplin. “Unrealistically, in the public sector, if HMRC enforcement overturns an ‘outside IR35’ determination, they will lose money to the Treasury.”