Describing its customer services as “at an all-time low”, continuing a five-year decline, the report goes on to say that “HMRC is apparently struggling to cope”, citing a dual rise in the taxpayer population and the complexity of people’s tax affairs.

As many in the contracting and recruitment sectors would expect, the organisation’s handling of IR35 off-payroll rules issues came under significant fire in the report, which stemmed from a Public Accounts hearing in December 2023 to scrutinise HMRC’s performance. The PAC said it was “concerned” that HMRC’s approach to tackling the IR35 off-payroll rules was “deterring legitimate economic activity, and that a lack of confidence in how to apply the rules, together with HMRC’s tough approach when taxpayers make mistakes, is unnecessarily putting companies off using contractors”.

The PAC has recommended that HMRC provides the Committee with the number of active litigation cases for IR35 and the amount of tax at risk and assess the impact of HMRC's approach to administering IR35 reforms on the use of contractors in different sectors.

Commenting on the IR35-related segment of the report, Dave Chaplin, CEO of Contractor Shield, said: “We currently have a ‘bad policing’ problem with IR35, where the IR35 tax police are writing their own rule book, and not following the law, leaving taxpayers with the only option of appealing to an expensive and costly tax tribunal, which many cannot afford. 

“IR35 tax cases are notoriously complex, demonstrated by the fact that in the last 24 IR35 tax tribunal hearings, HMRC has fielded barristers in all cases, except two.” He noted that this fact contradicted a claim by Jim Harra, permanent secretary and CEO, HMRC, in oral evidence to the PAC that in most hearings HMRC do not use legal counsel.

Key highlights of the PAC report include:

• In 2022-23, 62.7% of callers waited more than 10 minutes to speak to an adviser, up from 46.3% in 2021-22.
• At £814bn in 2022-23, tax revenues are at “a record high”, but HMRC still fell £2bn short of its £36bn target for compliance yield.
• The number of criminal prosecutions by HMRC fell to 240 in 2022-23 from 691 in 2019-20.

The PAC also voiced its concern that HMRC needed “sufficient checks to protect taxpayers from being pursued too forcefully”. 

The committee further rounded on HMRC for “not taking seriously enough the distress caused to innocent citizens” when, for instance, companies use the wrong address to register their business. One particular case involved a taxpayer receiving more than 10,000 letters due to an agent registering companies for VAT at the taxpayer’s address rather than a serviced office that shared the same postcode. 

The committee said it had “repeatedly” raised this particular case but HMRC had been unable to prevent further letters being sent out to the wrong address, “including demands for payments”. 

“Even now, HMRC cannot guarantee further letters will not be sent,” the PAC said.

Further, the committee said: “We are not convinced that customers have an easily accessible and responsive route via which they can raise concerns about HMRC’s debt collection activities,” the committee said. Among its recommendations was that HMRC establish “a clear, easily accessible route” for taxpayers to report issues they face when dealing with debt collection agencies working on behalf of HMRC. Also, the committee said, HMRC must report back to them with a summary of “any issues raised and how HMRC has dealt with them”. 

Despite its strong criticism of HMRC, the report was described as “disappointing” for the contracting sector by Crawford Temple, CEO of Professional Passport, an assessor of payment intermediary compliance. 

“Whilst the report does reference HMRC taking action against promoting [tax avoidance] schemes, it has failed to recognise the importance of the use of data that HMRC already holds to identify these schemes quickly,” he said. “It also fails the contractors duped into these arrangements by not holding HMRC firmly to account on action against promoters rather than contractors.

“PAC exists to hold government departments to account so it is frustrating to see such a lack and depth of understanding that once again allows HMRC off the hook, rather than being challenged on its actions and performance.”

The full report can be accessed here.

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