HM Revenue & Customs (HMRC) will review IR35 off-pay work legislation in response to claims by the Public Accounts Committee (PAC) that there are ‘structural issues’ which need to be addressed in terms of how avoidance rules work tax in the public sector.
Several months have passed since the PAC published its damning report on the fallout from the introduction of IR35 reforms in the public sector in April 2017, which concluded that HMRC’s ‘hasty implementation’ of changes had caused a “widespread non-compliance”.
As proof, the Committee cited the list of ministerial departments – which includes the Department of Work and Pensionsthe home office and the Ministry of Justice – who had 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 its continued crackdown on disguised employment, were first rolled out in the public sector in April 2017, before being extended to the private sector in April 2021.
Prior to the changes taking effect, contractors to the public limited company were responsible for determining whether the work they were doing for their end customers meant that they should be taxed in the same way as permanent employees (at the inside the IR35) or self-employed workers (outside the IR35). ).
According to HMRC, this self-classification system has led some contractors to deliberately misclassify themselves as working outside IR35 in a bid to minimize their employment tax liability.
HMRC has now published its response to the PAC’s findings, which saw the tax collection agency commit to taking action on a range of recommendations made by the Committee on how to improve compliance with the reforms. As such, HMRC has agreed to do more research on the impact of the reforms by forging closer links with contracting stakeholders and departmental compliance officers, and to ‘consider’ the additional customer support that can offer end-recruiters struggling with the changes.
HMRC also agreed to review the processes it has in place for contractors who have reason to challenge their IR35 status determinations, and pledged to share details of a cost-benefit analysis with the Committee. reforms. All of these commitments have a confirmed implementation date of December 2023.
However, perhaps the most important work that HMRC has agreed to do is to respond to the PAC’s recommendation to review the operation of the IR35 rules and address several issues relating to their operation in practice.
“Including ensuring that HMRC has the data it needs to accurately reflect each worker’s tax position in the event of non-compliance; and HMRC does not end up taxing the same income twice or unwittingly contributing to workers who do not pay their fair share of tax,” the PAC recommendation said.
HMRC was criticized in February 2022 for failing to inform contractors that they could miss the opportunity to recover the tax they have already paid if the public sector organization hiring them breaches IR35 rules .
This is because when calculating the amount of tax payable by a non-compliant public sector body, HMRC does not take into account the amounts of corporation tax or value added tax that contractors working for such organizations will have. already paid.
As a result, HMRC found itself accused of over-collecting tax, which it has repeatedly denied, stating that it “only collects what is due under the law and, as such, HMRC collects the correct amount of tax due under the law”. legislation at the time of its collection”.
In its response to the PAC recommendations, HMRC said it had already put in place a process to let contractors know they have the right to claim back any tax they have overpaid in cases like this one, and said it would continue to review how it works in practice to make sure it does it as “efficiently as possible”.
He added: ‘Relevant information is needed from the client organization to enable HMRC to operate the process as they are the one engaging the worker. HMRC seeks the required information from client organizations at the start of a compliance investigation to increase the chances of obtaining the relevant data. HMRC will continue to review this process to ensure it works as efficiently as possible.
Elsewhere, HMRC has also confirmed that it has set up a working group with external stakeholders to consider whether a legislative solution can be found so that the department can account for taxes already paid by contractors.
“[This will ensure] HMRC does not tax the same income twice and workers pay a share of the tax payable,” he said. “HMRC will continue this work.”
However, there is no target date for implementation shared by HMRC for this recommendation.
Dave Chaplin, CEO of contractor compliance consultancy IR35 Shield, said HMRC’s reliance on the notification procedure in relation to the tax over-collection issue is insufficient and legislation is needed to solve. “In my opinion, it’s not strong enough; there should be a legal obligation for HMRC to locate and process the refund,” he said. “If HMRC fails to do this, the ‘payer’s’ bill should be reduced by a deemed amount of tax paid.
“It is heartening to read that HMRC is actively seeking to finally resolve the offsets issue, as currently a business has to pay the full tax bill unfairly, and the contractor pays nothing,” Chaplin said. “Absurdly, in the public sector, if HMRC law enforcement overturns ‘outside IR35’ determinations, they end up losing Treasury money.”