Public Accounts Committee MPs slam ‘just about everything HMRC has done’ with IR35 reform

The UK taxman waving an accusing finger in the face of government departments over IR35 reform has failed to distract an influential panel of MPs from HMRC’s own failings.

In a new report based on evidence sessions in which the taxman blamed departments’ contractual ignorance for £263m in IR35 penalties, the PAC says the fault is HMRC’s.

The MPs, sitting on the Public Accounts Committee (PAC) say: “High levels of non-compliance in central government reflect poor implementation by HMRC”.

'Fiddling'

Mistakes by departments tasked with putting the off-payroll rules in place were “likely,” as HMRC “rushed” implementation, with those affected getting “only two months” to prep.,

Then, far from corrective action, HMRC did “little to understand” wider impacts; neglected to make “robust” cost assessments, and now is still “not doing enough” to understand effects.

Instead, and in a damning conclusion by the MPs, the UK’s tax authority is accused of “fiddling.”

And perhaps worse than causing problems and not moving to fix them (‘we’re not confident HMRC works proactively’), the taxman shuns new IR35-related issues when shown them.

'HMRC is too dismissive'

In fact, HMRC is “not convinced by evidence provided by others -- even where this indicates there may be significant issues.”

In short, add the MPs in relation to pointers about problems caused by its IR35 frameworks of 2017 and 2021, HMRC is “too dismissive”.

The result for the UK – specifically taxpayer-funded bodies, large and mid-sized companies, recruitment firms and contractors, is that “structural problems remain” with IR35’s operation.

'Just about everything HMRC has done with IR35 criticised'

Status expert Kate Cottrell who previously worked for the Revenue, says that overall and as far as indictments go, the MPs’ conclusions probably could not be any more damning.

“The Public Accounts Committee criticises just about everything HMRC has done with IR35 reform,” Ms Cottrell, co-founder of IR35 advisory Bauer & Cotrell told ContractorUK.

“I agree entirely with all the PAC’s recommendations. But how many more times do the same things have to be said to HMRC?

“Many IR35 advisers have simply run out of goodwill and cannot afford to keep saying the same over and over again, just to be ignored and dismissed as offering ‘anecdotal’ evidence.”

'Tip of the iceberg'

Andy Chamberlain of the Association of Independent Professionals and the Self-Employed reads the 21-page report similarly, finding it to contain many scathing criticisms of HMRC.

“Today’s report is a damning indictment of the IR35 rules,” Mr Chamberlain, IPSE’s policy director said yesterday.

“[We] hope that the report jolts the government into action. It is clear the rules urgently need a rethink. The damage of the reforms to the public sector is just the tip of the iceberg – the much larger private sector is also really struggling”.

'IR35 dispute process too difficult'

The struggle for contractors is often around challenging incorrect IR35 status determinations -- a process which the PAC condemns as “too difficult.”

The committee observes that if an end-user decides not to change status following an appeal, the contractor has “no further recourse,” except to “seek a refund from HMRC.”

But it is “unclear” how widespread such self-assessing on a self-employed basis following an inside IR35 determination is, “because HMRC does not monitor this.”

'Off-payroll reforms aren't fit for purpose'

Treasury minister Lucy Frazer incorrectly said in an IR35 probe conducted by the House of Lords that challenging an IR35-caught decision via tax return was inappropriate.

To avoid owing contractors money later down the line, or fearing non-compliance, end-users are “changing” how they hire, such as “no longer engaging workers through PSCs.”

As shocking as it is to the affected workers, the assessment by the MPs is not news to NumberMill boss Louise Rayner.

“All these findings from the PAC come as no surprise to me. The IR35 reforms…are not fit for purpose…and have merely served as an aggressive tax collection regime.”

'Toss of a coin liabilities'

In a statement to ContractorUK, accountant Ms Rayner continued: “In our experience contractors are being blanketed or assessed incorrectly. 

“End-hirers and agencies alike are too scared of the potential ‘toss of a coin’ liabilities. And there is also the impact on contractors of being pushed in to PAYE arrangements.

“In the public sector, we have seen rates having to be increased [to get contractors to accept ‘inside’ roles]. So the intended extra collection of taxes is wiped out by the extra costs.”

'Up to HMRC to prove it'

Launching the report, PAC chair Dame Meg Hillier said it was now “up to HMRC” to prove it was “correctly claiming revenues under the system.”

And the Labour MP also said that HMRC must prove “that the additional revenues raised are worth the costs” and “unintended consequences” which the labour market is suffering from due to IR35 reform.

Julia Kermode of IWORK, reflected: “HMRC is not doing enough to understand the impact of the reforms, the financial costs, and there are still structural problems with IR35 itself. 

“So why didn't anyone tell HMRC this before they went ahead? Oh hang on a minute, we all did! Several times in fact.

"But true to form, HMRC ploughed on regardless, driven by an outdated view of 'employment' taxes and wholly inaccurate perceptions of the contractor workforce.”

'Businsses too scared to hire PSCs'

Kermode says it must be “wrong” that businesses are often “too scared” to engage Personal Service Companies, despite PSCs being legitimate vehicles to trade through.

She added: “These points [in the 23-page report] will come as no surprise to many of us, but they're important as [they’re now] being said by the Public Accounts Committee.

“This is a very influential group of MPs whose job it is to scrutinise government, and they are rightly very scathing of the IR35 reforms.”

'Roaring success'

But ask HMRC about IR35 reform (public or private) and the department “will say it’s a roaring success,” according to NumberMill’s Ms Rayner.

Seb Maley of IR35 contract review firm Qdos explains how the taxman is able to justify such a claim.

“HMRC has said the changes are generating more tax revenue,” Qdos’s CEO began.

“But this isn’t necessarily a sign of improved compliance. In our experience, it’s a direct result of genuine contractors being forced to operate on the payroll. 

“[Also] the risk-averse approach taken by some businesses is…what the government refuses to acknowledge… -- that many organisations have stopped engaging contractors altogether due to IR35 reform.”

'Adversely affecting employment opportunities'

Yet Dame Hillier is trying to force HMRC into the acknowledgement, as the PAC wants to see it run research to check IR35 is “not adversely affecting employment opportunities.”

Bauer & Cottrell is encouraging but not optimistic.

“The PAC’s report is very good but a standout comment is that they are very concerned that ‘non-compliance in the public sector may be much more widespread.’

“Yet it doesn’t look likely HMRC will finally admit what a complete mess it has made of IR35, and is continuing to make.”

'You have clearly only listened to HMRC and Treasury'

The advisory’s Ms Cottrell explained her firm’s assessment: “A letter recently from the Loan Charge & Taxpayer Fairness APPG to the minister in charge of HMRC [Ms Frazer], speaks of being ‘deeply disappointed’ with her ‘evasive’ answers.

“Given that the letter adds that, ‘So far, you have clearly only listened to HMRC and Treasury advisers and have not challenged any of the information they provide you with or write in your name,’ perhaps we shouldn’t expect much from the PAC’s recommendations, even if they are all sound.”

Graham Webber, tax director of WTT Consulting is keeping his hopes grounded too.

Cutting to the rub, the tax dispute specialist said: “As long as HMRC can show an ‘improvement’ in revenues, they appear to care little for anything else.”

'Produce a cost-benefit analysis, HMRC'

But again Dame Hillier and her PAC members, including Sir Geoffrey Clifton-Brown MP of the Conservatives, and Sarah Olney MP of the Lib Dems, sound unaccepting.

“HMRC should produce and present to parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain.”

The 16-strong MP committee further recommends: “HMRC should develop robust estimates of non-compliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools.

“It should adopt a similar approach for the private sector as the reforms bed in and write to us with an update in six months’ time.”

'Make it easier to comply with IR35'

Also to be communicated to the committee in November 2022, HMRC must detail the outcome of it ‘proactively identifying and working with sectors that have been particularly affected’ by IR35 reform, including how it can “make it easier [for taxpayers] to comply.”

The Revenue is additionally asked by the MPs to review how the off-payroll framework is working and “whether it can be made more efficient and effective,” including with its officials “developing solutions” to “not end up taxing the same income twice.”

With contractors still in mind, the PAC tells HMRC it should ensure a “fast and independent” process for contractors to resolve disputes over IR35 status determinations is made available, adding:

“As part of this, [HMRC] should assess the extent to which workers are using existing appeals routes, and how well they are working.”

Leaving the Revenue in no doubt about her dissatisfaction, and her appetite for the tax office to make numerous improvements to IR35 reform, Dame Hillier said: “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.”

UPDATE: On Friday May 27th, an HMRC spokesperson said: “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.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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