HMRC review IR35 guidance in response to Public Accounts Committee criticism

HMRC have responded to criticisms levelled at it in a report published by the Public Accounts Committee (PAC) in May 2022, which had suggested that there were high levels of non-compliance with the off-payroll IR35 rules, resulting from poor implementation by HMRC and other government bodies.

HMRC’s published response outlines several proposed changes that they consider will improve the way in which the off-payroll IR35 rules work. These include up-dated guidance together with the provision of a robust cost-benefit analysis of the impact of the rules, which they suggest will significantly improve non-compliance, although no figures or estimates have been provided by HMRC to support such non-compliance claims.

However, those of us expecting a quick response from HMRC will be disappointed as they have made it clear that no changes will be put in place before December 2023. 

In their response, HMRC have said that they will look to expand their work into obtaining insight from customers on common issues around the IR35 rules by collating outcomes from their existing compliance activities. They also intend to continue to build upon their existing engagement with representative bodies together with their own customer compliance managers. In doing so, HMRC hope to be able to identify any additional support that customers may need and also to provide updates, guidance and targeted communications.

One of the more contentious areas identified by the PAC report focused on where individuals felt that their status determinations were wrong, coupled with the lack of a route to challenge such determinations. HMRC have indicated that, in these circumstances, a worker should submit a self-assessment return detailing their own assessment, thereby allowing HMRC to review the employment status determination within a 12-month enquiry window.

The suggestion is that if HMRC cannot agree with the customer opinion then an appeal can be lodged for the tax tribunal to decide the appropriate employment status. However, this would undoubtably incur additional time and costs for the worker which will have to be weighed against the liability in dispute.

HMRC have also confirmed that they are looking into the anomaly surrounding the collection of PAYE tax and Class 1 National Insurance Contributions (NIC) from an engager where it is decided the off-payroll rules apply, only for the worker to subsequently reclaim the tax and NIC it has paid on the same income and effectively benefit from the engager meeting the worker’s tax and NIC liability.

HMRC have advised that work is also underway to look for a suitable solution that allows them to take account of taxes that the worker and intermediary have already paid, thus ensuring that they do not tax the same income twice. Currently, however, HMRC have not yet indicated a target date for the implementation of any changes relating to this issue and to the matter of ensuring that the appropriate tax is paid by the correct entity.  

HMRC should now begin to publish its figures on the actual off-payroll IR35 compliance costs to a business, as PAC have asked to understand the cost benefits of the reforms along with the number of disputes businesses are facing from the assessment of employment status of its off-payroll workers.

In conclusion it looks as though HMRC are beginning to acknowledge that the off-payroll IR35 implementation has not gone as smoothly as was claimed and that the PAC is requesting that HMRC review its performance objectively and react to the criticisms levelled at it.

The hope now is that clear guidance and support in respect of the compliance reforms will actually be provided by HMRC to their customers.

If you would like to discuss your businesses off-payroll and employment status compliance in more detail, please feel free to contact The Guild.