National Audit Office releases its investigation into the implementation of IR35 tax reforms

10 February 2022

The National Audit Office (NAO) has released its investigation into the implementation of IR35 tax reforms. The report covers the risks of implementation, compliance, lessons learned and recommendations for Her Majesty’s Revenue and Customs (HMRC) to improve. It follows the 2017 reforms to the public sector and the 2021 reforms in the private sector.

Initial areas of concern were that public bodies had little time to review guidance or test tools before the rules came into effect. The full version of Check Employment Status for Tax (CEST) tool was not released until March 2017, with only 1 month until the reforms were due to begin. The guidance provided was broad in scope and didn’t provide examples relevant to public bodies for the 2017 reforms.

The NAO indicate that HMRC underestimated the cost to employers of implementing the reforms. As good practice surrounding IR35 rules is established with public organisations, dedicated staff and processes have been put in place at additional cost. HMRC assumed with ‘business as usual’ these costs would diminish over time. The NAO also remarked that public bodies and stakeholder said that guidance and tools could go further to support. It pointed out the differences between the private and public sectors that bring new challenges and reveal flaws in the system that were not previously apparent when only reforming one sector.

The recommendations made by the NAO were:

•    Further develop the CEST tool and accompanying guidance to make it as easy as possible to use accurately
•    Assess the usefulness of CEST to different sectors
•    Identify and set out case examples of good implementation to promote compliance by helping organisations get determinations and tax deductions right first time
•    Update its estimate of compliance costs to hiring organisations based on actual experience, to help all parties understand the scale of activity needed and how HMRC can best support implementation
•    Develop a more effective and efficient system to ensure HMRC accurately collects the total taxes due from workers and hiring organisations when errors have been made
•    Build on its improved collaboration with stakeholders to enable constructive discussions and pre-empt challenges in the public and private sectors

The impacts of the IR35 reforms are difficult to assess with the added complexity Brexit and the pandemic played for self employed workers. 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.
“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.”

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