Lessons from implementing IR35 reforms – addressing the gaps in the system

Findings outlined in the House of Commons report ‘Lessons from implementing the IR35 reforms’ make for very stark reading, and it appears the reforms have still not been implemented accurately across the public sector.

However, organisations and authorities in this sector should be paving the way for the others to follow, which means potential millions of pounds is being lost to the Exchequer through incorrect tax status assessments. The report has quoted £263 million in back-taxes are owed or expected to be owed by the public sector, but the actual figure may potentially be a lot higher.

This news may come as another nail in the coffin for government departments, but the difficulty in accurately determining employment status should not solely lie at the public sectors door. It has been well-documented that the implementation of the reforms in 2017 were rushed, ill-informed and lacked the structure required for all parties to properly and accurately assess the status of off-payroll workers. Whilst some tweaks were made to the private sector implementation in April 2021, the big question of ‘how does one consistently determine the status assessment for off-payroll workers accurately’ still alludes to all businesses in every sector.

HMRC has been criticised for not progressing its guidance or Check Employment Status for Tax (CEST) tool to any meaningful dial that can actually help in answering this question. This is all too clear in the number of tax employment status tribunals, where the courts are not able themselves to agree on a definitive employment status for particular engagements, despite having all the facts, past cases and considerable experience to assist in their conclusions. It is clear from all sides that HMRC does need to do more in the pursuit of accurate status assessments and certainly move away from the thought that it costs a business no more than £35 to perform a status assessment. Some businesses are spending thousands of pounds on one status assessment to gain a level of accuracy it can tolerate and still they conceive that HMRC may not agree with their conclusions.

The details are always going to be open to discussion and many can talk for hours on this subject, but the challenging questions on wider economic impacts of the reform can cut through the noise to understand HMRC’s deeper thinking. The House of Commons report digs deeper into the commercial questions of the greater impact on UK workforce and the many job vacancies not being filled. The report infers HMRC has not undertaken research on the economic impact, particularly from the view of the worker, but believes the reforms are working and increasing the tax and NIC revenues, which was the aim of the reforms.

Data in the short term may appear to show the impact HMRC was hoping for from the reforms, whilst not taking into account other factors which may also account for these trends. The medium to long-term output will demonstrate the true impact of the reforms and unless more is done to help businesses accurately comply with the rules, the impact may be through forced behavioural changes, rather than actual employment status reality.