HMRC responds to Public Accounts Committee report, but ducks its 'IR35 reform deterring economic activity' charge

HMRC has responded to a Public Accounts Committee report which found IR35 reform cut the UK's stock of limited company workers in half.

But the PAC made only two IR35 recommendations, despite its quite significant-sounding fear that HMRC’s approach to the OPW rules was “deterring legitimate economic activity.”

PAC’s first IR35-related recommendation was for HMRC to share the number of active litigation cases for IR35 and the tax amounts at risk.

The second was for HMRC to assess the impact of how it administers IR35 reform on the use of contractors in different sectors.

'Tax at stake'

But the PAC’s fear that HMRC’s IR35 reform approach is an economic deterrent was behind neither recommendation.

For that overriding concern from the Public Accounts Committee, the Revenue was only recommended to:

“Provide to the committee further detail of the value of tax at stake in cases of criminal prosecutions in recent years.”

'Agrees with the committee's recommendation'

In response to the PAC, staffed by influential MPs, HMRC says it “agrees with the committee’s recommendation.”

But HMRC’s reply to the PAC in the section where it re-states the economic deterrent charge, and states the government agrees with the recommendation, contains no new data on IR35/OPW.

The Revenue also doesn’t respond with any words to the committee’s concern -- that how the department tackles IR35 reform deters economic activity.

'Surprised it's now ticked off and labelled as implemented'

HMRC saying it ‘accepts the PAC’s recommendation’ (despite its reply not correlating to the issue which is partly behind the recommendation), concludes matters elsewhere in the report too.

“The PAC recommended HMRC should assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.

“But I’m surprised that this recommendation has [now] been ‘ticked off’ and reported as ‘implemented,’” begins Brookson’s Matt Fryer.

“The justification for this is independent research conducted over two years ago …[which had] a relatively low sample size, and some of HMRC’s own research”.

'Questionable'

In line with Fryer’s assessment, rather than assess afresh as the PAC clearly hoped, HMRC’s reply cites three studies already conducted.

Widely acknowledged to be "unreliable" and "downplaying", respectively, the first study (run by HMRC itself) dates back to before private sector IR35 reform even applied, and the second (also pre-private sector reform) bypassed the central issue of 'blanketing.'

The third, most recent study (Dec 2022), when blanketing had taken root, was described by one IR35 expert as “questionable” -- and by HMRC itself as 'indicative.' 

One advisory went further, saying the HMRC study ought to "come with a health warning."

'HMRC is probably unconcerned by blanketing'

“In my view, HMRC has not identified but is probably not concerned with the significant use of blanket bans,” Fryer, Brookson’s managing director yesterday told ContractorUK.

“HMRC is similarly probably not concerned by PSCs…[suffering] incorrect inside IR35 determinations which we still see as being widespread”.

A chartered accountant, Fryer added: “This is unfair for contractors but unfortunately, there is not much to protect them from unfair treatment [under] the off-payroll working rules.

“Yet it would be interesting to assess the impact of the recent off-set rules which significantly ‘de-risk’ the off-payroll rules for the end-client -- and may result in a relaxation of blanket bans on PSCs.”

'Deaf ears'

Quick readers of HMRC’s responses to the PAC may welcome it saying it “remains committed to understanding the impacts” of the OPW rules. 

But with no new studies or research due, despite being asked by the PAC for an assessment, Qdos’s Seb Maley has heard enough.

“HMRC continually says it will explore the impacts of the off-payroll working rules, but this rhetoric is falling on deaf ears now,” Mr Maley told ContractorUK.

“It’s been three years since the roll out in the private sector. And the government still [somehow claims] the changes have been a success.”

'Status usually straightforward to determine'

Maley is more sympathetic to HMRC saying that “employment status is usually straightforward to determine” and “uncontroversial.”

The response was issued by the Revenue in relation to the PAC’s first recommendation -- to give updated IR35 case numbers and tax-risk.

HMRC says 44 cases concerning IR35 since 2000 have been heard at the FTT and its predecessor court.

Forty-four “represents a very small proportion” of the total number of PSCs scrutinised under IR35 however, the department says.

'Active IR35 appeals are at a total of 26'

HMRC adds that 26 active IR35 appeals were on file as of March 2024 (20 were awaiting an FTT hearing), out of 2,012 FTT cases in total.

“For all 26 cases, the tax under dispute totals approximately £13.6million,” the Revenue told the PAC, adding:

“Since 1 January 2020, HMRC has won over 70 per cent of employment status and IR35 cases. This includes two decisions handed down in HMRC’s favour.”

'HMRC IR35 figures don't capture the full story'

A senior tax consultant, Charlie Hemsworth, believes HMRC is being a bit disingenuous.

"HMRC’s success rate of over 70 percent in IR35 cases since January 2020 does not capture the full story,” Hemsworth cautions.

“It overlooks the immense financial and emotional toll these proceedings take on individuals, many of whom are simply trying to navigate a convoluted tax system.”

“Yes, only 44 cases have reached tribunal, but this could suggest that many [contractors] feel pressured to settle [with HMRC], due to the daunting prospect and cost of a drawn-out legal case.”

'Disproportionate'

Bauer & Cottrell’s senior consultant, Hemsworth believes the figure of 26 appeals involving £13.6m in disputed taxes, “highlights the disproportionate personal and financial strain these protracted cases impose on the involved parties.”

“Although this is a relatively minor sum in the grand scheme of public finances, it should be concerning to the Public Accounts Committee that while thousands of cases pass through the First-tier Tribunal every year, those related to IR35 seem particularly prone to dragging on.

“Hopefully to the MPs, as it does to our IR35 advisory, this raises serious questions about the efficiency of HMRC’s enforcement and intent behind its litigation strategies.”

'HMRC does not usually persist on a IR35 tax dispute unless it would secure best practicable return'

On strategy, HMRC claims it will “not usually persist with a tax dispute unless it would secure the best practicable return for the exchequer.”

The taxman further qualified in response to the PAC’s recommendation one:

“And…[where we have] assessed [our] case as being one which…[we believe] would be successful in litigation.

“HMRC will take account of the tax at stake in the case and also the potential liabilities of other customers where there is the potential for wider impact.”

'No need to ban contractors'

At Qdos, an IR35 contract review firm, the feeling is HMRC is half right, and half wrong – or at least not living up to its own rhetoric.

The firm’s CEO Mr Maley explained: “HMRC is right to say that employment status is typically straightforward to determine and uncontroversial.

“This is something businesses must bear in mind when considering their approach to IR35 and the off-payroll working rules. There’s simply no need to ban contractors or force them onto the payroll irrespective of true IR35 status.

“But I do take issue with HMRC saying that it won’t usually persist with IR35 disputes unless it would secure the best return for the exchequer.

“The recent Kaye Adams case springs to mind as an example of a case where surely it would have cost the taxpayer money overall.”

'At odds with the lived reality'

But Adams and the many non-celebrity subjects of IR35 enquiries won’t likely agree IR35 status is typically uncomplicated.

“The claim by HMRC that employment status is 'usually straightforward to determine' is fundamentally at odds with the lived reality of those whose cases have been through the courts, some nearing a decade in duration,” says Hemsworth, who is also Bauer & Cottrell’s director.

She continued: “Not to mention the countless stakeholders who have testified to parliamentary committees about the difficulties of implementing the off-payroll rules.

“The shortcomings of HMRC's own CEST tool, which often fails to capture the complexities of employment status or align with established case law, further demonstrates that determining employment status is far from straightforward.”

'HMRC gathers customer insight through various sources'

In its response to the PAC, the Revenue says it “gathers customer insight through various sources to understand how customers in different sectors are responding to the reform, and whether a sector may have been particularly affected or may face particular challenges in applying the rules.”

Taking CEST as an example, HMRC says since March 27th 2024, users are asked an optional question about which sector the contractor operates in.

The department told the committee that answers will “help HMRC better understand customer usage of CEST across different sectors and identify any specific sectoral challenges.”

'CEST user-journey may not be simplier or much different'

“Customers may not see their journey as being simpler/much different at this point from the old platform,” an HMRC official said of CEST, albeit at the Revenue’s March 14th employment and payroll group meeting, and referring to CEST’s new Ocelot platform.

“[But improvements facilitated by the new platform such as] adding the new hyperlinks has given customers easier access to the right guidance to understand how to answer the questions in line with HMRC’s interpretation of employment status.

“The new platform provides HMRC with better analytical data about how the tool is used, and offers more comprehensive editorial control.”

'Create different outcomes'

Potentially concerned about what ‘analytical data’ might entail were the March meeting’s industry attendees.

But HMRC said it could not identify “unique IP addresses,” or monitor if people have completed the CEST form repeatedly to “create different outcomes.”

Speaking last night about the tax department’s responses, Hemsworth reflected: “HMRC continues to portray an overly optimistic view of the IR35 situation, which in my opinion significantly contrasts with the experiences of countless contractors and businesses, and the practical difficulties in determining employment status that continue to be a major issue for them.

“HMRC is given the same feedback [on IR35 reform] time and time again, [but] is yet to truly absorb and act adequately on it. Only when it does, can there be any hope of achieving a tax system that is fair, clear, and beneficial for all parties involved.”