Source · Select Committees · Public Accounts Committee
Recommendation 13
13
Accepted
HMRC considers its IR35 litigation approach fair, with most pre-reform cases favouring HMRC.
Conclusion
We asked whether HMRC’s pursuit of some IR35 cases through the courts was fair and proportionate. HMRC said it will always try to resolve disputes by agreement but that some litigation is inevitable. HMRC said it does not underestimate the stress involved when a taxpayer is facing potential litigation. It has published a litigation and settlement strategy that sets out when it will pursue a dispute through litigation.42 It said that much of the well-publicised litigation relates to cases before the reforms, and that around 70% of recent employment status disputes have been ruled in favour of HMRC.43 HMRC reports that IR35 litigation is rare, with only 22 cases heard at the First-Tier Tribunal since 2017.44 HMRC said through this litigation it has been testing the employment status rules and how they can be applied.45 It said it may need to update its guidance and tools on the basis of the courts’ judgements.46 However, HMRC did not accept that its guidance was not clear.47
Government Response Summary
The government agrees and states the recommendation is implemented, explaining that HMRC already makes litigation decisions in line with its published Litigation and Settlement Strategy. HMRC aims to resolve disputes by agreement and only persists with litigation where it expects success and a strong return for the Exchequer.
Government Response
Accepted
HM Government
Accepted
4.6 The government agrees with the Committee’s recommendation. Recommendation implemented 4.7 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. 4.8 HMRC makes decisions on litigation in line with its published Litigation and Settlement Strategy. 4.9 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. 4.10 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. 4.11 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). 4.12 For all 26 cases, the tax under dispute totals approximately £13.6 million. 4.13 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.