Widespread non-compliance in central Government with own IR35 tax rules “not acceptable” as £hundreds of millions owed in back-taxes

25 May 2022

In a report today the Public Accounts Committee today says “widespread non-compliance” with IR35 tax reforms in central government departments is “not acceptable” after HMRC “rushed implementation of the reforms; provided poor guidance; and public bodies struggled with its tool to assess status”.

The Committee says “government bodies should be best placed to understand the rules”, which now also affect the private and third sectors, but in 2020-21 it became clear that many central government departments had struggled to comply with the reforms and owed or expected to owe HM Revenue & Customs (HMRC) £263 million in back-taxes.

Many public bodies reported that the reforms caused problems for them recruiting contractors and some contractors report that, to avoid perceived risks of failing to comply, their clients are changing hiring practices - such as no longer engaging workers through personal service companies.

HMRC has “done little to understand the wider impact of the reforms on workers or labour markets”, or particular sectors, and “underestimated the additional costs of implementing the reforms to hiring organisations”. It claims to be unconvinced by such evidence but has not conducted its own research, making it “difficult to disaggregate the direct impact of the reforms from the effects of EU Exit and the COVID-19 pandemic”.

While the reforms appear to be bringing in more tax revenue it is “clear that structural problems remain with the way IR35 operates”:

Hiring organisations unable to properly assess a worker’s status
No appeals process means it’s too difficult for workers to challenge incorrect determinations
A lack of good data and legislative provisions has seen HMRC taxing the same income twice: a particular concern in the public sector where government can end up subsidising private sector contractors for all of their tax

Chair's comments

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said:

“While workers in the gig economy have challenged their work and tax status in the courts, there is no recourse for workers deemed subject to IR35 tax rules despite the confusion and non-compliance that persist even in central government itself.

After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labour market.”

Further information

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