The Government has responded to the Public Account Committee’s report on the lessons learned from implementing IR35 that was published in May 2022, but IR35 compliance experts aren’t convinced contractor concerns are being fairly addressed by HMRC or policymakers.
The Public Account Committee’s (PAC) ‘Lessons from implementing IR35 reforms’ report (published in May 2022) has highlighted a number of problems resulting from the introduction of IR35 reform, but contractors and the companies servicing them are far from convinced that the self-employed economy will benefit from any impactful change following the response.
“The Public Accounts Committee provided a damning assessment of IR35 reform, with the report calling on HMRC to make changes to these flawed rules,” said Seb Maley, CEO of contractor insurer and IR compliance firm Qdos.
“And while HMRC has agreed with the recommendations made, the tax office is merely promising to review and research these issues further,” he said.
“Ultimately, this response lacks a concrete promise to resolve several of the fundamental issues resulting directly from the introduction of IR35 reform – whether that’s to ensure contractors have a fair shot at overturning unfair IR35 determinations or to give businesses every chance to comply with the rules.
It’s a disappointing – albeit predictable – response that we’ve seen far too often from the government whenever it’s pressed on IR35.Seb Maley, CEO of Qdos
On close inspection of the report Dave Chaplin, CEO of tax compliance firm IR35 Shield said the government’s response to the PAC report on IR35 and lessons learned contains both positives and negatives.
“It is very disappointing to read in the opening paragraph a legally incorrect comment by Government when stating that disguised employees are ‘…people who do the same job in the same manner as an employee.’” said Chaplin.
Chaplin said inaccuracies were found in the report, which should shoot off alarm bells for freelancers.
“This is either ignorant of the law, a deliberate misrepresentation, or ironically highlights that Government doesn’t understand the complexities of status law. There is nothing in the common law on status that refers to “same job” or “same manner”.Dave Chaplin, CEO of tax compliance firm IR35 Shield
“Status law is concerned with the nature of how someone is engaged and seeks to ascertain whether it is a commercial agreement (for services) or employment (of service). If the test was as simple as needing to find someone else doing the same job in the same manner, then cases would not need to go to the Supreme Court, and neither would HMRC need to publish reams of guidance.”
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Is the IR35 offsets problem resolved?
“It is encouraging to read that HMRC is actively seeking to finally resolve the offsets problem, because currently a firm has to unfairly pick up the entire tax bill, and the contractor pays none,” said Chaplin.
“Absurdly, in the public sector, if HMRC enforcement overturns ‘outside IR35’ determinations, they end up losing the Treasury money,” he said referencing Point 6.4 of the report.
Chaplin explained further:
In 6.2 HMRC claims it has a process to reduce collecting tax twice but will only do so if it has sufficient information to identify the worker. In my view, this is not strong enough; there should be a statutory requirement for HMRC to locate and process the refund. If HMRC fails to do so, the ‘fee-payers’ bill should be reduced by a deemed amount of tax paid.
“Ivory Tower thinking”
“The points made in section 2 about the appeal routes demonstrate ivory tower thinking and is a firm departure from the reality of market behaviour on planet earth,” said Chaplin.
Chaplin said to suggest a worker can seek to reclaim monies from an incorrect assessment via the self-assessment tax system is “misguided” because the worker cannot reclaim the bulk of the deducted monies, which is employers’ National Insurance.
Also, he said, to suggest the worker can appeal to a tax tribunal is absurd, because the cost of doing so will far outweigh the tax and could take up to 10 years to resolve as we have seen happen.
“The Government’s comments claiming there are ‘appeal routes’ is impractical nonsense and highlights the impediment to natural justice inherent in the IR35 Reforms,” said Chaplin.