Her Majesty's Revenue and Customs (HMRC) are to review IR35 and how it operates, following criticism by the Public Accounts Committee’s (PAC).
HMRC To Review IR35
The underlying reason for the decision to review IR35 by HMRC relates to the deficiencies of its Check Employment Status for Tax (CEST) tool.
As we highlighted in a previous article, the Government has been completely humiliated 3 times over IR35 failings by its very own departments and agencies, failings which have all been traced back to the deficiencies of the CEST tool. As a result of those failings, HM Courts & Tribunal Service (HMCTS), the Department for Work and Pensions (DWP), and the Home Office, have all had to pay out many million of pounds in tax arrears, and interest on those arrears
The CEST tool has been found to be so defective, that one study by ContractorCalculator found that 42% of assessments were inaccurate. Another study also found that CEST was unable to provide any kind of determination in 188,791 cases, which equates to 19% - almost 1 in 5.
Given this appalling litany of failure, especially by those Government departments that failed to comply with the IR35 changes, the Public Accounts Committee (PAC) carried out a formal investigation. Its report was published on the 25th May 2022.
In its report, PAC found that there was: "High levels of non-compliance in central government...This is not acceptable considering government departments should be in a good place to understand the rules and communicate with HMRC. However, mistakes were likely as the reforms were rushed in by HMRC...There were also problems with the guidance and Check Employment Status for Tax (CEST) tool that HMRC provided."
The report added: "The complexity of the rules, and the perceived risk to hiring organisations of failing to comply with them, may lead to changes in behaviour by both workers and hirers. In some cases, contractors have reported that their last clients had stopped all use of PSCs, while some contractors have increased their rates or avoided work if it is within scope of the IR35 rules. Such behavioural impacts could have knock-on consequences for workers and labour markets, such as loss of work or ability to work flexibly."
Given this, the chair of the PAC, Dame Meg Hillier MP, stated: "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. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labour market."
In light of this criticism by the PAC, the HMRC has announced that it will review IR35 and how it works, and have undertaken to implement changes by December 2023.
Government Review May Render HMRC Proposals Redundant
HMRC's decision to review IR35, however, could well be rendered redundant by the commitment made by the new Prime Minister, Liz Truss, to also review IR35.
Whilst the decision to review IR35 by HMRC will focus only on how the operation of the IR35 changes can be improved, the review to be conducted by the Truss Government will be far wider, as we highlighted in a recent article. It could even result in the IR35 changes being rescinded altogether, which would in turn make the review by HMRC redundant.
The decision to review IR35 by Liz Truss is a result of the highly detrimental impact that it has had on the UK economy in terms of the following:-
- By undermining the UK’s flexible economy. Prior to IR35, contractors could be taken on and let go as and when required, making the resourcing and implementation of projects more viable and manageable. This is no longer possible under the IR35 rules, thereby making projects more expensive and risky.
- The lack of alignment of employment status with tax status means that those who now have to work within IR35 have to pay the same rates of Income Tax and National Insurance as employees, but at the same time do not benefit from having any actual employment rights. That is, they are treated as employees only for tax purposes, without having the same status within the labour market.
In an interview with The Sun, Liz Truss stated that her decision to review IR35 was to address these issues. She stated: "If you’re self-employed, you don’t get the same benefits as being in a big company. You don’t get paid holidays, you didn’t get those benefits. So the tax system should reflect that more...I believe that we can grow the British economy faster. But we need to back business to deliver and we need to stop putting so much red tape, so much tax on business, and we need to get on with delivering things quicker."
