Public Sector IR35 Non-Compliance

A recent report published by the Public Accounts Committee (PAC) suggests the IR35 reform has been quite the disaster – no surprise there – but one of its most shocking findings is that many central government departments themselves have failed to comply with IR35 reform legislation and now collectively owe HMRC £263 million in back taxes.

The reform came into effect back in April 2017 as a way of tackling disguised employment, making the hiring company responsible for deciding a contractor’s IR35 status rather than the contractor themselves. There has been a huge amount of backlash from both companies and contractors ever since the reform was announced, with many claiming that it’s not suitable or fit for purpose. The PAC report seems to support this view, outlining a range of structural issues that make compliance difficult to achieve.

Government Departments Owe £263 Million In Back Taxes

It’s a worrying sign when Government departments are failing to comply with their own legislation! As the PAC report states, “Such widespread non-compliance is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC.”

What chance do average companies have of being compliant if the Government can’t follow their own rules correctly?

The CEST Tool Is Problematic

The Check Employment Status for Tax (CEST) tool was set up by HMRC to help companies correctly determine contractors’ IR35 statuses. Yet it actually seems to do the opposite. The PAC report stated that some of the tool’s questions were “difficult to interpret correctly” and that guidance issued by HMRC was too long or too general. Another worrying study from ContractorCalculator found the CEST tool to be completely unreliable, with only 14 out of 24 cases (58%) returning a “properly correct outcome”. This supports the view that it’s tricky for hiring companies to accurately make IR35 determinations. Therefore, HMRC really needs to review its guidance and CEST tool in order to help improve compliance – something which the PAC recommended in their report.

Challenging An IR35 Status Can Prove Very Difficult

The PAC report identified that it’s very difficult for contractors to challenge their IR35 status if they feel it’s incorrect. As mentioned above, hiring companies may find it difficult to confidently make IR35 determinations due to the lack of clear guidance and required information. Therefore, many companies may err on the side of caution because of the financial consequences of getting it wrong.

The report goes on to mention that there’s no independent process for appealing IR35 statuses, which leaves contractors pretty much at the mercy of the hiring company’s decision. A contractor can appeal to the company; however, “If both parties continue to disagree, the worker does not have an independent route for further appeal, but can seek a refund from HMRC by completing their self-assessment return with what they believe to be the correct tax treatment. There is no route for individuals to appeal past this point.”

The IR35 Reform Can – And Often Does – Lead To Double Taxation

Another concerning issue discussed within the report was that there is often duplicated taxation on a worker’s income:

“Furthermore, the legislative framework does not allow HMRC to offset liabilities against taxes already paid, meaning it collects tax twice on the same income and workers become able to reclaim all the tax they paid.”

Elsewhere, the report also stated: “This is of particular concern in the public sector where—if workers or their personal service companies reclaim the taxes they already paid—the government could end up subsidising private sector contractors for all of their tax.”

Obviously this is a concerning issue that needs to be addressed imminently, and the PAC recommends that HMRC undertakes a review to address problems such as this and to establish whether the system can be made more efficient and effective.

The general consensus from the PAC report seems to be that this public sector non-compliance was due to a variety of factors: the reform was too rushed, the guidance was inadequate and the CEST tool proved problematic. The above concerns are just some of the points discussed in the report. You can find the full report here: Lessons from implementing IR35 reforms.