Recommendations & Conclusions
6 items
6
Recommendation
Second Report - Lessons from implementi…
Acknowledged
Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice. The IR35 rules do not work well with the realities Lessons from implementing IR35 reforms 7 of contracting, both in determining workers’ tax status and in resolving issues when mistakes have been …
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Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice. The IR35 rules do not work well with the realities Lessons from implementing IR35 reforms 7 of contracting, both in determining workers’ tax status and in resolving issues when mistakes have been made. For example, hiring organisations are now responsible for assessing tax status, but may not have access to all the information necessary to assess the totality of a worker’s income and other work. While HMRC interprets IR35 as applying to individual engagements, recent court cases have focused more on a worker’s business in the round. The legal framework and realities of contracting also make it difficult to correct errors if HMRC later finds a hiring organisation to be non-compliant. Hirers often lack the data on affected workers that HMRC would need to work out their actual tax position. 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. Ironically, the public sector may end up paying all the tax on workers it incorrectly assessed as self-employed. This position does not look sustainable and risks being more costly to all parties the longer it goes on. Recommendation: 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. 8 Lessons from implementing IR35 reforms 1 How the IR35 reforms work in practice
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Government response AI summary
The government agrees with the committee's recommendation to review the system, but the response primarily describes existing processes for addressing tax collection issues and ongoing efforts to improve data collection and prevent double taxation, without committing to specific new actions or a timeline for the …
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HM Treasury
9
Conclusion
Second Report - Lessons from implementi…
Acknowledged
Since 2021, individuals have had the statutory right to raise a dispute with their hirer if they disagree with their status determination, and the hiring organisation must respond formally within 45 days. If both parties continue to disagree, the worker does not have an independent route for further appeal, but …
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Since 2021, individuals have had the statutory right to raise a dispute with their hirer if they disagree with their status determination, and the hiring organisation must respond formally within 45 days. 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.15
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Government response AI summary
The government acknowledges the conclusion and notes that there are established appeal routes for customers who disagree with tax assessments, but asserts that the reforms to the off-payroll working rules were the best way to achieve correct employment status from the start.
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HM Treasury
12
Conclusion
Second Report - Lessons from implementi…
Acknowledged
The IR35 reforms made hiring organisations responsible for determining a contractor’s tax status.21 HMRC told us it interprets IR35 as applying to individual engagements, but that courts have not always taken the same approach. In particular, recent court rulings suggest that it may be necessary to consider a contractors’ work …
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The IR35 reforms made hiring organisations responsible for determining a contractor’s tax status.21 HMRC told us it interprets IR35 as applying to individual engagements, but that courts have not always taken the same approach. In particular, recent court rulings suggest that it may be necessary to consider a contractors’ work portfolio and income in the round, rather than on an engagement-by-engagement basis. If so, it is hard to see how a hiring organisation can realistically have all the information it would need to do this better than the workers themselves.22
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Government response AI summary
The government agrees with the committee's recommendation to review the system, but the response primarily describes existing processes for addressing tax collection issues and ongoing efforts to improve data collection and prevent double taxation, without committing to specific new actions or a timeline for the …
Read full response →
HM Treasury
13
Conclusion
Second Report - Lessons from implementi…
Acknowledged
The realities of contracting also mean that hiring organisations will likely not have the data required to identify and correct mistakes when workers have been incorrectly engaged on a self-employed basis. In particular, the hirer would not normally collect a worker’s National Insurance number if they are self-employed. However, if …
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The realities of contracting also mean that hiring organisations will likely not have the data required to identify and correct mistakes when workers have been incorrectly engaged on a self-employed basis. In particular, the hirer would not normally collect a worker’s National Insurance number if they are self-employed. However, if HMRC later judges that the worker should have been treated as employed, it needs the National Insurance number to identify their actual tax position. This means that when HMRC finds workers have been misclassified, it normally lacks the data to accurately calculate the additional taxes owed.23
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Government response AI summary
The government agrees with the committee's recommendation to review the system, but the response primarily describes existing processes for addressing tax collection issues and ongoing efforts to improve data collection and prevent double taxation, without committing to specific new actions or a timeline for the …
Read full response →
HM Treasury
16
Conclusion
Second Report - Lessons from implementi…
Acknowledged
Stakeholders have for some time reported that risk-averseness of hiring organisations could result in a decision to stop engaging freelance contractors.30 More recently, surveys conducted by organisations that represent or provide tax advice to contractors have found substantial numbers of contractors reporting that their last clients either completely ceased using …
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Stakeholders have for some time reported that risk-averseness of hiring organisations could result in a decision to stop engaging freelance contractors.30 More recently, surveys conducted by organisations that represent or provide tax advice to contractors have found substantial numbers of contractors reporting that their last clients either completely ceased using PSCs or made a blanket determination that all off-payroll workers should be employed for tax purposes.31 HMRCs own research into the experience of public bodies has also found that significant minorities of hiring organisations had experienced difficulties filling vacancies, or had seen contractors increasing their fee rates.32
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Government response AI summary
The government agrees with the committee's recommendation to research the impacts of the IR35 reforms, and the response primarily describes existing and planned research efforts.
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HM Treasury
18
Conclusion
Second Report - Lessons from implementi…
Acknowledged
In addition to understanding the impact of the reforms on the economy and workforce as a whole, it is also important to establish whether any sectors have been disproportionately affected and what additional guidance or support may be needed. For example, issues in UK supply chains have been widely reported …
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In addition to understanding the impact of the reforms on the economy and workforce as a whole, it is also important to establish whether any sectors have been disproportionately affected and what additional guidance or support may be needed. For example, issues in UK supply chains have been widely reported in recent months, such as 28 Q40 29 C&AG’s Report, paras 3.7, 5.13 30 C&AG’s Report, para 3.4; House of Lords Economic Affairs Committee Finance Bill Sub-Committee Off-Payroll working: treating people fairly, 1st Report of Session 2019–21, HL Paper 50, 27 April 2020 31 Q40; C&AG’s Report, para 3.7 32 C&AG’s Report, para 3.9 33 Qq 40–41, 76 34 HMRC, Long term effects of the Off-Payroll working rules reform for public sector organisations, February 2022, para 1.35 35 Q75 12 Lessons from implementing IR35 reforms in fuel and groceries. There are particular concerns among IT contractors that they are missing out on contracts as a result of engagers wanting to avoid the process of assessing them for their IR35 status, and in some cases hiring overseas where the rules do not apply.36 There have also been concerns raised in the broadcasting sector, and we reported in April 2019 on problems the BBC faced implementing the reforms.37
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Government response AI summary
The government agrees with the committee's recommendation to research the impacts of the IR35 reforms, and the response primarily describes existing and planned research efforts.
Read full response →
HM Treasury