Recommendation 4

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.