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HMRC to examine how IR35 works used following PAC criticism

Almost a year have passed because the Public Accounts Committee issued its damning report on the fallout from the introduction of the IR35 reforms in the general public sector, and HMRC has shared its feedback on its contents

Caroline Donnelly

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Published: 02 Sep 2022 10: 15

HM Revenue & Customs (HMRC) will review the IR35 off-payroll working legislation in reaction to the general public Accounts Committees (PAC) claims you can find structural issues that need addressing with regards to the way the tax avoidance rules work in the general public sector.

Almost a year have passed because the PAC published its damning report on the fallout from the introduction of the IR35 reforms to the general public sector in April 2017, which figured HMRCs rushed implementation of the changes caused widespread non-compliance.

As proof this, the Committee pointed to the set of government departments such as the Department for Work and Pensions, the OFFICE AT HOME and the Ministry of Justice that had finished up owing vast sums of pounds in unpaid tax to HMRC to make IR35 compliance errors.

The reforms, introduced by HMRC within its ongoing clampdown on disguised employment, were first rolled out to the general public sector in April 2017, before being extended to the private sector in April 2021.

Prior to the changes arrived to force, limited company contractors were in charge of determining set up work they did because of their end-clients meant they must be taxed just as as permanent employees (inside IR35) or off-payroll workers (outside IR35).

In accordance with HMRC, this technique of self-classification has led to some contractors deliberately misclassifying themselves as working outside IR35 in order to minimise their employment tax liabilities.

HMRC has published its reaction to the PAC findings, which includes seen the tax collection agency invest in acting on a number of recommendations the Committee made about how exactly to boost compliance with the reforms. Therefore, HMRC has decided to do more research in to the impact of the reforms by forging closer ties with contracting stakeholders and government department compliance chiefs, and think about what additional customer care it could offer to end-hirers grappling with the changes.

Cost-benefit analysis

HMRC in addition has decided to revise the processes it has set up for contractors who’ve cause to challenge their IR35 status determinations, and contains focused on sharing with the Committee information on a cost-benefit analysis of the reforms. Most of these commitments have a confirmed implementation date of December 2023.

However, most likely the biggest good article HMRC has decided to do is react to the PACs recommendation that it review the way the IR35 rules will work, and address several issues with how they’re recognized to work used.

Including making certain HMRC gets the data it requires to accurately reflect each workers tax position in cases of non-compliance; and HMRC will not find yourself taxing exactly the same income twice or unwittingly adding to workers not paying their fair share of tax, the PAC recommendation stated.

HMRC came under fire in February 2022 for failing woefully to notify contractors they could be passing up on the chance to reclaim tax they have paid if the general public sector organisation engaging them has fallen foul of the IR35 rules.

The reason being, when calculating the quantity of tax a non-compliant public sector body owes, HMRC is failing woefully to look at the corporate tax or value-added tax amounts the contractors doing work for these organisations could have already paid.

Because of this, HMRC has found itself accused of over-collecting tax, that is a claim it has repeatedly denied by stating that it only collects what’s due in law and, therefore, HMRC collects the right quantity of tax due beneath the legislation at that time it really is collected.

In its reaction to PACs recommendations, HMRC said it already includes a process set up to notify contractors they are eligible for seek a repayment of any taxes they will have overpaid in instances like this, and said it’ll continue steadily to review how this works used to ensure it can in order effectively as you possibly can.

It added: Relevant information is necessary from your client organisation make it possible for HMRC to use the process, because they are the party who engages the worker. HMRC is seeking the mandatory information from client organisations first of a compliance enquiry to improve the probability of acquiring the relevant data. HMRC will continue steadily to review this technique to make sure it works as effectively as you possibly can.

Elsewhere, HMRC also confirmed that it has generated an operating group with external stakeholders to take into account whether a legislative solution are available therefore the department may take account of the taxes which have recently been paid by contractors.

[This will ensure] HMRC will not tax exactly the same income twice and that workers pay a share of the tax liability, it said. HMRC will continue with this particular work.

However, there is absolutely no target implementation date shared by HMRC because of this recommendation.

Dave Chaplin, CEO of contractor compliance consultancy IR35 Shield, said HMRCs reliance on the notification procedure where in fact the over-collection of tax issue can be involved is insufficient, and legislation is required to resolve it. In my own view, this is simply not strong enough; there must be a statutory requirement of HMRC to find and process the refund, he said. If HMRC does not achieve this, the fee-payers bill ought to be reduced by way of a deemed level of tax paid.

It really is encouraging to learn that HMRC is actively wanting to finally resolve the offsets problem, because currently a company must unfairly grab the entire goverment tax bill, and the contractor pays none, said Chaplin. Absurdly, in the general public sector, if HMRC enforcement overturns outside IR35 determinations, they find yourself losing the Treasury money.

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