Recommendation 6

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