‘Opportunities’ for to HMRC to improve on IR35 customer experience

HM Revenue & Customs has an opportunity to improve its customer experience and compliance in putting IR35 reforms into practice.

This follows a flurry of reports and commentary about IR35 reforms this week from the National Audit Office, research commissioned by HM Revenue & Customs and the House of Lords, which included an NAO determination that “there are opportunities” for HMRC to improve.

The NAO investigation focused on the application of IR35 reforms to the public sector in 2017, four years before they were applied to the private sector last year.

Among other findings, the NAO report on its investigation points out that government departments and agencies “owed, paid or expected” to be owed a total of £263m in additional tax for failing to administer the reforms correctly. 

Also, public bodies told the NAO they had incurred additional costs and challenges in recruiting or retaining contractors. The NAO said, “managing disputes with contractors, and more generally engaging with them to answer queries about the reforms and changes in employment status, has taken additional time and resource”.

In commentary released by the House of Lords Economic Affairs Finance Bill Sub-Committee around a letter sent to government, committee chair Lord Bridges of Headley was critical of the focus of the HMRC-commissioned research. “By only focusing on engagers, it will only get half of the story. Its scope needs to be widened to include contractors – and needs to be carried out more quickly,” he said. The committee, he added, “reiterates the call we made [in 2020] for the government to press ahead with implementing the proposals set out in the [Matthew] Taylor Review”.

The tone of the NAO’s findings contrasted with that of IFF Research and Frontier Economics, commissioned by HMRC to examine the long-term effects of the off-payroll working rules reform for public sector organisations, which also was issued this week. 

The IFF research said that 63% of individual sites surveyed felt it had been easy to comply with the 2017 reforms, with “individual site” referring to respondents who conduct payroll for their location only, as opposed to “central bodies”. Of central bodies, 53% said it had been difficult, with 46% saying it had been easy. 

Most sites and central bodies reported the reforms had “no effect” on contractors’ rates, the research for HMRC said. Conflicting slightly, the NAO report said: “Some public bodies have reported … that fee rates have risen.” However, the NAO report conceded that while they believed the fee rates increases were “at least partly due” to the IR35 reforms, it was hard to “disentangle” the effect from wider labour market trends affected by Covid-19 and Brexit.

Other findings from the NAO investigation:

  • HMRC’s current approach to correcting cases of non-compliance results in it collecting more tax in total than is due, and it does not yet have a plan to address this. “Once the non-compliant organisation accepts that its determinations were incorrect, the works become entitled to claim back the tax that they and their personal services company have already paid. If they do, they in effect pay no taxes on that income because these are borne in full by the non-compliant public body. However, HMRC does not actively promote this, and it is unclear how many workers reclaim their taxes in practice.”
  • HMRC may have underestimated the cost to employers of implementing the reforms. “Emerging good practice in the public sector suggests that significant investment may be needed in contracting organisations to set up dedicated staff, independent review structures and formal approval at senior levels. Public bodies we interviewed explained that in some cases a lot of staff time had to be put into administration and ongoing compliance work.”
  • Despite improvements HMRC has made to its guidance and tools, public bodies and other stakeholders told us it could go further to support implementation. “Mixed views” were received by the NAO on the controversial Check Employment Status Test (CEST) tool. “Some welcome the improvements that have been made since it was first launched,” the NAO report said. “However, based on our survey and interviews with public bodies and other stakeholders, there are opportunities for HMRC to continue refining its guidance and CEST.”
  • Inherent differences between the public and private sectors mean that HMRC faces new and challenging risks with the wider implementation of IR35 reforms. Bigger challenges for HMRC to identify and monitor risks of non-compliance because labour markets in the private and third sector are larger. Also, there may be a greater risk of companies making error when determining tax status or of knock-on effects resulting in workers changing careers or business moving overseas because of complex supply chains.
  • Uncertainty over HMRC’s approach to non-compliance in the private sector.

IR35 expert Dave Chaplin commented on the NAO report, saying: “In essence, £263m was paid by a government body to another government body, and now all those contractors can reclaim their tax back – that would result in a loss of revenue as a result of their investigations.” 

Chaplin also pointed out: “Furthermore, given that firms’ decisions on status are not binding in law, there is nothing to stop a scurrilous contractor claiming the tax back by saying they were really inside IR35. What would HMRC do then? Would they refund them and pursue the client? Or would they fight the contractor in court? 

“What a mess.”

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