Source · Select Committees · Public Accounts Committee
Recommendation 4
4
Accepted
Provide data on criminal prosecution tax at stake and IR35 litigation; assess IR35 reforms' impact.
Conclusion
We are concerned that HMRC’s approach to serious abuse is not deterring criminal activity sufficiently, while at the same time its approach to tackling IR35 is deterring legitimate economic activity. HMRC says that it is increasingly focusing its criminal prosecutions on the most serious cases, with the number of criminal prosecutions falling from 691 in 2019–20 to 240 in 2022–23. But we are concerned that if fewer criminals are prosecuted this sends the wrong message. In the case of civil disputes over the application of IR35 rules, HMRC said that it has been using litigation through the courts to test the employment status rules and that it may need to update its guidance and tools on the basis of the courts’ judgements. HMRC said that the reforms to IR35 shift the burden of determining employment status from workers to employers. Since the IR35 reforms, employers have moved between 150,000 and 200,000 workers from contractor status onto their own payroll. However, we are concerned that a lack of confidence in how to apply the rules, together with HMRC’s tough approach when taxpayers make mistakes, is deterring companies from using contractors unnecessarily. Recommendation 4: HMRC should: a) provide to the Committee further detail of the value of tax at stake in cases of criminal prosecutions in recent years and further explanation of how HMRC is using fewer prosecutions to achieve greater deterrence of egregious non-compliance; b) provide to the Committee the number of active litigation cases for IR35 and the amount of tax at risk; and c) assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.
Government Response Summary
The government agrees. HMRC added an optional question to its Check Employment Status for Tax (CEST) tool on 27 March 2024, asking customers for their sector, to better understand usage and identify specific sectoral challenges related to IR35 reforms.
Government Response
Accepted
HM Government
Accepted
The government agrees with the Committee’s recommendation. Recommendation implemented Employment status is usually straightforward to determine and uncontroversial, but some cases are more complex or finely balanced and may result in a dispute between the taxpayer and HMRC. HMRC aims to resolve disputes by agreement with the taxpayer, without the need for litigation; however, where the taxpayer and HMRC cannot reach an agreement, the taxpayer has a right to refer the dispute for determination by the First-tier Tribunal. HMRC makes decisions on litigation in line with its published Litigation and Settlement Strategy. As disputes are costly for both HMRC and its customers, HMRC will not usually persist with a tax dispute unless it would secure the best practicable return for the Exchequer and HMRC has assessed its case as being one which it believes would be successful in litigation. HMRC will take account of the tax at stake in the case and also the potential liabilities of other customers where there is the potential for wider impact. Since 2000, when IR35 was introduced, the First-tier Tribunal and its predecessor, the Special Commissioners, have heard 44 cases. The number of cases heard represents a very small proportion of the number of individuals whose employment status HMRC examined to consider whether they were within the scope of the IR35 legislation. As at the end of March 2024, there were 26 active appeals, of which 20 were awaiting listing for a substantive First-tier Tribunal hearing. This compares with the total number of 2,012 cases the First-tier Tribunal heard in 2022-23 (Table 16 of HMRC’s Tax Assurance Commissioner Annual Report 2022-23). For all 26 cases, the tax under dispute totals approximately £13.6 million. Since 1 January 2020, HMRC has won over 70 per cent of employment status and IR35 cases. This includes two decisions handed down in HMRC’s favour. 4d. PAC recommendation: HMRC should: • assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors. The government agrees with the Committee’s recommendation. Recommendation implemented HMRC remains committed to understanding the impacts of the off-payroll working reforms. In December 2022, HMRC published research on the short-term effects of the 2021 reform, including insight on the way off-payroll workers are engaged following the reform. This showed that around half of organisations engaging off-payroll workers found the reforms easy to administer. Research also found most organisations used at least one area of HMRC support to understand and apply the rules, with the overwhelming majority finding this support useful. This followed similar research published into the 2017 reform. Furthermore, HMRC published its own analysis into the impacts of the 2021 reform. The analysis showed the sectors with the highest proportion of workers who were previously working through personal service companies and moved to another organisation’s payroll, were from professional, scientific and technical; information and communication; transport and storage; finance and insurance; and administrative and support services. HMRC will update this analysis when new data becomes available. HMRC also gathers customer insight through various sources to understand how customers in different sectors are responding to the reform and whether a sector may have been particularly affected or may face particular challenges in applying the rules. Feeding into this, on 27 March 2024, HMRC included an optional question in its Check Employment Status for Tax (CEST) tool asking from which sector the customer operates. This insight will help HMRC better understand customer usage of CEST across different sectors and identify any specific sectoral challenges.