The NAO investigation into off payroll working reforms

  • May 2022

The National Audit Office (NAO) team provides an overview of its investigation, which examined lessons from the implementation of the 2017 reforms to tax rules for off payroll working in the public sector

The National Audit Office (NAO) recently published its report on the implementation of reforms to IR35 off payroll working tax rules. IR35 was introduced in 2000 to limit the incentive for disguised employees (contractors who were employees in all but name) to contract their services through a personal service company, to reduce the taxes they had to pay.

However, for many years, the rules proved largely ineffective – it was the worker’s responsibility to determine their own tax status, and in 2016, Her Majesty’s Revenue and Customs (HMRC) estimated only 10% were doing so correctly. To tackle widespread non-compliance, the government reformed how the rules were administered in 2017, starting with the public sector. The reforms required public bodies to take ownership of determining the status of off payroll workers.


What caused the NAO to investigate the reforms?

Our investigation into the reforms was prompted by large liabilities on the balance sheets of major government departments for failure to operate the rules. NAO colleagues auditing the 2020/21 financial statements of central government bodies discovered over £260 million in losses and provisions, suggesting something had gone wrong when these organisations grappled with the new requirements.

This is a complex area of tax, which has a real impact on people’s lives, and is an area of law which is developing as cases go through the courts. The NAO doesn’t take a view on the merits of government’s policy objectives but reports on the efficiency and effectiveness with which those policies are implemented. Our investigation sought to bring clarity to a complex topic by setting out the facts on:

  • why the 2017 reforms were introduced

  • how they were implemented by HMRC and other public bodies

  • what impact they’ve had

  • some of the lessons HMRC has learned from the 2017 reforms

  • any further challenges.


What were the findings?

We found that, although the reforms appear to have achieved their primary purpose of tackling non-compliance, public bodies had issues implementing them. Firstly, public bodies had little time to familiarise themselves with the guidance and tools before the reforms were rolled out. HMRC published guidance in February 2017 – just two months before the new rules came into effect. The check employment status for tax (CEST) online tool, intended to help make status determinations, only became widely available in March 2017. It was later subject to substantial changes to address the difficulties some public bodies had in using it. Gareth Davies, head of the NAO, said: “The 2017 reforms to IR35 tax rules have achieved their primary purpose of reducing non-compliance. However, HMRC did not give public bodies sufficient time to prepare for the roll-out, and it was highly likely that mistakes would be made”.

We also reported some potential unintended consequences of how the reforms were implemented. Hiring organisations now bear the full burden of taxes due to HMRC when they make careless mistakes – these aren’t offset against any taxes already paid by the worker, which they become eligible to reclaim. Public bodies could therefore end up subsidising contractors’ taxes, as highlighted by Parliament’s Committee of Public Accounts in its recent evidence session with HMRC. This risk may also be having unintended impacts on hiring practices, with some contractors reporting difficulties being able to work flexibly, or at all, as clients are less willing to recruit off payroll workers. Substantial minorities of public bodies have also reported paying higher fees or facing difficulties filling vacancies.

Finally, HMRC has adapted its approach since 2017, including when extending the reforms to the private sector in 2021. In doing so, it has considered several lessons from the 2017 reforms. However, key challenges and areas of uncertainty remain. HMRC will need to ensure compliance over larger and more complex supply chains, and it’s currently unclear how its compliance approach will work in practice beyond the public sector. Head of the NAO, Gareth Davies, commented: “While key lessons were applied during the wider roll-out in 2021, inherent differences in labour markets create new challenges that HMRC will need to manage for the reforms to be a success”.



The recommendations in our report reflected the challenges noted above and are aimed at helping government ensure the legislation operates as intended. Our recommendations focused on ensuring:

  • hiring organisations have the appropriate tools and support to administer the rules correctly

  • HMRC understands the challenges that hiring organisations, workers and other stakeholders face

  • HMRC considers how the system as a whole needs to be administered to ensure it works well for all parties and the right tax is collected. 

The NAO investigation into off payroll working reforms

May 2022