HMRC To Review IR35 Legislation

Does IR35 affect you? Let’s have your thoughts

In response to a Public Accounts Committee review of the changes made to off-payroll legislation – also known as IR35 the government has published a response.  IR35 was originally introduced in April 2000 to prevent tax avoidance by disguised employees (those people who do the same job in the same manner as an employee but avoid paying tax, by providing their services through an intermediary company.)

However, despite this new legislation being in force HMRC found that adherence to IR35 compliance was extremely low.  Indeed, in 2016 HMRC estimated that only 10% of PSC’s (Personal Service Company) were applying the IR35 rules correctly which cost the exchequer £440 million. So, HMRC brought in new reforms to make the hiring body become liable for tax where it had failed to comply. These new reforms also applied to the public sector and were extended to include private and third sectors in April 2021 – of which an estimated 180,000 PSCs were affected.

Interestingly Network Rail / Department for Transport accounts for 2020-2021 show that the rail operator overhauled its off-payroll compliance process, meaning more than 70% of its contractors are now engaged outside of IR35.

Andy Chamberlain, Director of Policy at IPSE, said: “It’s certainly good news that Network Rail have changed tack and rowed back from their blanket inside-IR35 assessments. 

“After the damage the IR35 changes have done right across the contracting sector, we can only hope this is a sign of things to come, and that more organisations – in the public and private sectors alike – will recognise the legislation does not require all engagements to be processed through payroll. Clients can hire contractors on an ‘outside IR35’ basis and do so perfectly compliantly.

“Contractors and the wider self-employed sector are a crucial part of the workforce – in times of economic crisis and recession more than ever. The country needs contractors now, but the changes to IR35 have sent shockwaves through the sector at the very worst time, with risk-averse businesses of all kinds either only engaging inside IR35 contractors or scrapping their contractor workforces altogether. 

“We hope more organisations will follow this example, however, and row back from these terrible policies to engage vital contractors in a way that recognises their independent status.”

The outcome of the Public Accounts Committee has now forced HMRC to do more research into the impact of their reforms by forging closer relations with contracting stakeholders & consider what additional customer support it can offer to end hirers trying to cope 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 & confirmed that they will share with the details of a cost-benefit analysis of the reforms with the Committee. HMRC has to also yet to respond to the PACs review and provide further evidence of how the IR35 rules are working and how they are addressing several problems All of the above commitments have a confirmed implementation date of December 2023.