UK government releases IR35 lessons learned report

08 June 2022

The UK government has released a report exploring the implementation and roll-out of the IR35 reforms that came to the public sector in 2017. This report analyses the reforms and questions if the additional tax revenue brought in is proportionate to the structural problems within the current process.

Its introduction has been criticised for various reasons, including the Check Employment Status for Tax (CEST) tool. The tool aids with determinations but cannot give a definitive answer in many cases. The report also provides situations in which individuals have been taxed twice.

 

The conclusions and recommendations given within the report are:

 

  • High levels of non-compliance in central government reflect poor implementation by HMRC and other government bodies
    • HMRC should develop robust estimates of non-compliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools. It should adopt a similar approach for the private sector as the reforms bed in and write to us with an update in six months’ time
  • It is too difficult for workers to challenge incorrect status determinations
    • HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. As part of this, it should assess the extent to which workers are using existing appeals routes, and how well they are working
  • HMRC is not doing enough to understand the impact of the reforms on workers and labour markets
    • HMRC should conduct and publish specific research into the impacts of the IR35 reforms on contractors and labour markets, to check it is being applied as intended and not adversely affecting employment opportunities
  • There is no confidence that HMRC works proactively to establish whether any sectors have been affected disproportionately by the reforms and why
    • HMRC should proactively identify and work with sectors that have been particularly affected to understand the challenges, establish how to address them and make it easier to comply. HMRC should write to us with an update in six months with the outcome of this public engagement
  • HMRC has not made a robust assessment of the additional costs of implementing the reforms
    • In light of actual experience, HMRC should produce and present to Parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain
  • Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice
    • HMRC should review how the system is working and whether it can be made more efficient and effective. In particular, it should develop solutions to address problems with how the IR35 rules work in practice, including ensuring that HMRC has the data it needs to accurately reflect each worker’s tax position in cases of non-compliance; and HMRC does not end up taxing the same income twice, or unwittingly contributing to workers not paying their fair share in tax.
       

The EU exit and coronavirus pandemic have made it difficult to quantify the impact of off-payroll working and its associated costs. However, major failings in the systems structure have not been accounted for. With this report coming over one year after the reforms were expanded to the private sector, will we see further changes that could disrupt all businesses across the UK?


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