Recommendations & Conclusions
6 items
5
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
HMRC has not made a robust assessment of the additional costs of implementing the reforms. HMRC states that the IR35 reforms increased tax revenues by increasing the number of people employed for tax purposes, but it is unclear to what extent employment patterns have been affected by other factors. EU …
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HMRC has not made a robust assessment of the additional costs of implementing the reforms. HMRC states that the IR35 reforms increased tax revenues by increasing the number of people employed for tax purposes, but it is unclear to what extent employment patterns have been affected by other factors. EU Exit, the COVID-19 pandemic and other changes in government to reduce use of contractors mean HMRC cannot be certain to what extent the increase is due to the reforms. There is also not a complete picture of the costs of the reforms against which the benefits could be compared. The government introduced the reforms because it considered it too costly for HMRC to oversee an effective compliance regime with each individual PSC. HMRC also concluded that hiring organisations could administer the rules for less cost than PSCs doing it themselves. However, HMRC’s modelling of the cost to hiring organisations works out at just £35 a year per PSC, based on a theoretical minimum needed to comply. HMRC does not know what it actually costs all parts of the labour supply chain to administer the reforms in practice. Recommendation: 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.
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Government response AI summary
The government agrees to produce and present to Parliament a cost-benefit analysis of the reforms, but states that, based on current data, it does not believe it will be possible to publish a full cost-benefit analysis taking account of all parties in the supply chain.
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HM Treasury
7
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
We asked HMRC what level of non-compliance it expected there to be in smaller public bodies, and whether well-resourced departments struggling to comply is a worrying sign for the reforms more generally. HMRC suggested that smaller organisations may be better placed to comply, if key personnel involved in compliance are …
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We asked HMRC what level of non-compliance it expected there to be in smaller public bodies, and whether well-resourced departments struggling to comply is a worrying sign for the reforms more generally. HMRC suggested that smaller organisations may be better placed to comply, if key personnel involved in compliance are closer to the hiring parts of the organisation.11 However, HMRC also acknowledged that its compliance efforts had mainly been focused on government departments so far, after identifying a higher chance of compliance problems in its early risk assessments, compared with other public bodies.12 The ability of workers to appeal incorrect status determinations
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Government response AI summary
The government agrees with the committee's recommendation to support compliance but rejects the specific approach of developing an overall estimate of non-compliance. Instead, HMRC will expand its work to obtain customer insight and will consider additional support based on these findings, with a target implementation …
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HM Treasury
11
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
Evidence received from stakeholders indicated that many of the challenges with IR35 stem from underlying issues in tax administration.19 HMRC told us that it would be simpler and more straightforward to administer the tax system if tax liabilities of employed and self-employed were aligned, but that this is ultimately a …
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Evidence received from stakeholders indicated that many of the challenges with IR35 stem from underlying issues in tax administration.19 HMRC told us that it would be simpler and more straightforward to administer the tax system if tax liabilities of employed and self-employed were aligned, but that this is ultimately a matter for Ministers and Parliament.20 Nevertheless, we examined whether there are structural problems with how the rules work in practice.
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Government response AI summary
HMRC has already implemented a process to reduce the circumstances where it collects tax twice and has set up a working group to consider a legislative solution to account for taxes already paid. HMRC will notify the Committee of a target implementation date as soon …
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HM Treasury
14
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
Furthermore, the current legal framework does not let HMRC offset liabilities for non- compliance against any taxes already paid by workers and their PSCs.24 In law, HMRC must collect the full taxes that should originally have been paid from the hiring organisation. This means that HMRC collects tax twice on …
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Furthermore, the current legal framework does not let HMRC offset liabilities for non- compliance against any taxes already paid by workers and their PSCs.24 In law, HMRC must collect the full taxes that should originally have been paid from the hiring organisation. This means that HMRC collects tax twice on the same income, and that workers become able to reclaim all the taxes they already paid without needing to compensate the hiring organisation.25 Ironically, the public sector may therefore end up paying all the tax on workers it incorrectly assessed as self-employed. HMRC does not know how much this is happening, or to what extent it means the public sector is effectively subsidising private contractors.26 One tax advice firm told us that this issue has been raised with HMRC for some time, but HMRC has no current plans to address it.27 17 Qq 44–45 18 Qq 46, 48 19 ICAEW written evidence dated 11 February 2022 20 Q55 21 Q22 22 Qq 62, 64 23 Q56; C&AG’s Report, paras 4.12–4.13 24 Q15 25 C&AG’s report, paras 4.13–4.14 26 Qq 15, 17 27 Contractor Calculator written evidence dated 12 February 2022; C&AG’s report, para 19 Lessons from implementing IR35 reforms 11 2 Understanding the impacts of the IR35 reforms The impact of the reforms on workers and labour markets
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Government response AI summary
HMRC has already implemented a process to reduce the circumstances where it collects tax twice and has set up a working group to consider a legislative solution to account for taxes already paid. HMRC will notify the Committee of a target implementation date as soon …
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HM Treasury
21
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
There is also not a complete picture of the costs of the reforms against which the benefits could be compared. HMRC has estimated the cost to hiring organisations, but its modelling is based on a theoretical minimum needed to comply, rather than an estimate of what it actually costs organisations …
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There is also not a complete picture of the costs of the reforms against which the benefits could be compared. HMRC has estimated the cost to hiring organisations, but its modelling is based on a theoretical minimum needed to comply, rather than an estimate of what it actually costs organisations to administer the reforms in practice. While HMRC revisited its cost estimates in light of challenge and recommendations it received from a House of Lords inquiry in 2020, its basic approach has not changed. This means it is still based on a theoretical minimum, and still only covers the private sector.46 HMRC estimated that ongoing costs for the private sector would be £8.4 million a year, and that 36 Q25; 37 Q21; HC Committee of Public Accounts, BBC and personal service companies, Ninetieth Report of Session 2017–19, HC 1522, April 2019 38 C&AG’s Report, para 3.7 39 Qq 25, 75 40 C&AG’s Report, paras 26b, 5.11 41 Q51 42 Qq 36, 37; C&AG’s Report, para 13 43 Q36 44 Q37 45 Q69; C&AGs’ Report, para 3.3 46 Qq 26, 65; C&AG’s Report, para 5.10 Lessons from implementing IR35 reforms 13 240,000 PSCs would need to have their tax status assessed.47 This means an average cost to hiring organisations—to determine the tax status and perform all other administrative activities—of £35 a year per PSC. HMRC’s research has asked surveyed public bodies what they are spending in practice, but it does not have a total estimate for the public sector to compare with its previous estimates.48
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Government response AI summary
HMRC will share with the Committee and publish analysis setting out the estimated actual amount spent to comply with the reform by client organisations, alongside estimated additional receipts generated from the reform, but does not believe it will be possible to publish a full cost-benefit …
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HM Treasury
22
Recommendation
Second Report - Lessons from implementi…
Accepted in Part
HMRC does not have estimates for the costs incurred by organisations other than hiring bodies. The government introduced the reforms because it considered it too costly for HMRC to oversee an effective compliance regime with each individual PSC.49 It is not clear what HMRC’s own costs are for its compliance …
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HMRC does not have estimates for the costs incurred by organisations other than hiring bodies. The government introduced the reforms because it considered it too costly for HMRC to oversee an effective compliance regime with each individual PSC.49 It is not clear what HMRC’s own costs are for its compliance work before and after the reforms.50 In estimating the administrative burdens of the reforms to the private sector, HMRC also assumed that hiring organisations can administer the rules for less cost than PSCs doing it themselves.51 However, HMRC acknowledges that this assumption was based on PSCs applying the rules correctly under the previous regime, which is not what was happening in the real world—indeed, in 2016, HMRC estimated that only 10% of PSCs were compliant.52 It is also not evident that PSCs will no longer incur any administrative costs, particularly where only part of their business is determined as within the IR35 rules, which creates additional complexity and therefore cost.53 47 Q 39; Written evidence submitted by HMRC dated 10 March 2022 48 Q60 49 Q70; C&AG’s Report, para 1.11 50 Qq 59–61 51 Qq 59, 65; C&AG’s Report, para 5.10 52 Q65 53 Qq 81–82 14 Lessons from implementing IR35 reforms
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Government response AI summary
The government agrees to produce and present to Parliament a cost-benefit analysis of the reforms, but states that, based on current data, it does not believe it will be possible to publish a full cost-benefit analysis taking account of all parties in the supply chain.
Read full response →
HM Treasury