The government has published its response to a Public Accounts Committee (PAC) review of changes made to off-payroll legislation – also known as IR35 which was originally introduced in April 2000, with the objective to prevent tax avoidance by ‘disguised employees’. These are people who do the same job in the same manner as an employee but avoid income tax and National Insurance contributions (NICs) by providing services through an intermediary such as a personal service company (PSC). The legislation therefore introduced a requirement for workers engaged through intermediaries to assess their employment status for tax purposes. If they are deemed to be a ‘disguised employee’ they will be subject to income tax and NICs at source in the same way as regular employees.
However, HMRC found that adherence to these rules was low, despite government efforts to improve compliance between 2007 and 2015. In 2016, HMRC estimated that only 10% of PSCs were applying the IR35 rules correctly, costing the exchequer £440 million in the 2016–17 financial year. To improve compliance, the government introduced reforms that shifted responsibility for making status determinations from the worker to the hiring body, which also became liable for any unpaid tax where it had failed to comply. These reforms initially applied to the public sector from April 2017 (affecting around 50,000 PSCs) and were extended to include the private and third sectors in April 2021 (affecting an estimated 180,000 further PSCs).
HMRC has now committed to acting on a series of recommendations the PAC made about how to improve compliance with the reforms. As such, HMRC has agreed to do more research into the impact of the reforms by forging closer ties with contracting stakeholders and government department compliance chiefs, and “consider” what additional customer support it can offer to end-hirers grappling with the changes.
HMRC has also agreed to revise the processes it has in place for contractors who have cause to challenge their IR35 status determinations and has committed to sharing with the Committee details of a cost-benefit analysis of the reforms. All of these commitments have a confirmed implementation date of December 2023.
However, possibly the biggest piece of work HMRC has agreed to do is respond to the PAC’s recommendation that it review how the IR35 rules are working and address several problems with how they are known to work in practice.
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