In a critical examination, the Public Accounts Committee (PAC) meticulously assessed HMRC’s performance in 2022-23, placing particular emphasis on its handling of the contentious IR35 regulations. The committee highlighted the substantial deterrent effect on legitimate economic activity and raised concerns about the complexity of the Off-Payroll Rules (OPR). This article will delve into the key issues illuminated by the PAC and their implications for stakeholders in the contractor supply chain.
IR35 reforms causes businesses to deter legitimate economic activity
The PAC’s report spotlights the intricate nature of the OPR, in some cases directly pushing companies to relocate operations overseas. Additionally, it expresses concern about HMRC’s stringent approach deterring companies from engaging contractors. Notably, the report reveals a significant shift, with 150,000 to 200,000 workers transitioning from contractor status to in-house employment post-IR35 reforms.
Ryan Dawson, IR35 Project Manager for Kingsbridge, acknowledges that “the complexity of the OPR and HMRC’s stringent stance are indeed influencing businesses, hindering the use of contractors. Through fear of the implications of getting OPR wrong, the report reveals that many businesses have either blanket banned contractors or are limiting their use.”
Proportionality in enforcement actions of the Off-Payroll Rules
The fairness and proportionality of HMRC’s pursuit of IR35 cases through the courts are questioned in the PAC’s report. History shows us that HMRC often loses as many Tribunal cases as they win, emphasising the need for clarity in HMRC’s approach to enforcement, guidance, and tools, including the controversial Check Employment Status for Tax (CEST) tool.
This disproportionality of enforcement can be demonstrated in cases such as Kaye Adams’s, where the presenter was pursued for 10 years by HMRC. The report questions whether enforcement actions align with the size of the debt and the circumstances of the taxpayer under investigation.
Furthermore, it notes a significant decrease in criminal prosecutions, from 691 in 2019–20 to 240 in 2022–23. Ryan Dawson comments: “the proportionality of HMRC’s enforcement actions is a critical aspect, and recent trends raise questions about its effectiveness. Ultimately where actions are not proportionate, the taxpayer is the one who suffers which frankly isn’t fair.”
HMRC customer service shows signs of decline
Highlighted in the PAC report is HMRC’s customer service reaching an all-time low due to strategic decisions such as closing helplines and directing queries to online resources. This compounds challenges for businesses seeking clarity on IR35 rules, contributing to a growing lack of confidence in their application.
Dawson notes that “the challenges businesses face in understanding IR35 and the OPR are compounded by HMRC’s customer service struggles.”
Educational insights on the Off-Payroll Rules
Reflecting on previous critical reports, such as the House of Lords Economic Affairs Committee Finance Bill Sub-Committee report in April 2020, the article emphasises the challenges of leading HMRC towards improvements. While criticism is still prevalent, stakeholders are yet to see tangible actions following such reports.
“When IR35 was introduced, its target was those cases where an employment relationship is being disguised through use of an intermediary,” comments Dawson. “However, HMRC has invested considerable resource to challenging – at times, disproportionately – taxpayers through the courts. HMRC appears to lose as many Tribunal cases in this area as it wins which suggests that the goalposts are moving closer to testing shades of grey.”
HMRC argues that “through this litigation, it has been testing the employment status rules and how they can be applied” – however, being subject to an IR35 enquiry and having to defend their position often impacts taxpayers both financially and emotionally and this approach to testing the rules seems unnecessarily severe.
“My fear, as with most of these reports, is what action will come next,” Dawson says. “As we’ve seen with previous condemnatory reports, such as the House of Lords Economic Affairs Committee Finance Bill Sub-Committee report in April 2020, it’s easy to criticize HMRC but no meaningful changes can be seen as of yet for the taxpayers subject to the application of these rules.”
How Kingsbridge can help you to navigate the ongoing IR35 challenge
In light of ongoing challenges with IR35, stakeholders in the contractor supply chain are urged to stay informed and prepared; the significance of IR35 insurance remains pivotal to shield against uncertainties in HMRC investigations and potential tax liabilities.
Explore our comprehensive IR35 insurance and consultancy solutions to safeguard your business against the uncertainties of HMRC investigations. Whether you’re a contractor, recruiter, or business engaging with contractors, we can help to provide peace of mind in navigating the complexities of IR35.
To discover how our offerings can help you comply with IR35 legislation, and protect yourself against it, get in touch with our friendly team today.
