MPs irate at government non-compliance with IR35 reforms

The criticism is made in the PAC’s report, ‘Lessons from implementing IR35 Reforms’.

The off-payroll working rules (IR35) make sure that workers who would have been an employee if they were providing their services directly to the client, pay broadly the same income tax and national insurance contributions (NICs) as employees. From 6 April 2017 public authorities became responsible for deciding if the rules applied where they contracted workers who provide services through their own intermediary. From 6 April 2021 the rules were extended to medium and large-sized clients outside the public sector. If a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and whether the rules apply. If the rules apply, income tax and employee NICs must be deducted from fees and paid to HMRC. In addition, employer NICs and Apprenticeship Levy, if applicable, must be paid to HMRC by the person who pays the worker’s intermediary.

Unacceptable non-compliance with new rules

The PAC report says that, in 2020–21, it became clear that many central government departments had struggled to comply with the IR35 reforms and therefore owed or expected to owe HMRC a total of £263 million in back-taxes in 2020–21. “Such widespread non-compliance is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC”, says the committee.

The PAC claims the compliance issues were compounded as HMRC rushed implementation of the reforms, provided poor guidance and public bodies struggled with its tool to assess status.

Many public bodies report that the reforms have caused problems for them recruiting contractors because of rising pay rates, states the report.


The PAC report that some contractors had said that, to avoid perceived risks of failing to comply, their clients are changing hiring practices, such as no longer engaging workers through personal service companies (PSCs). They note that HMRC are unconvinced by such evidence, but point out that the tax authority have not yet conducted their own research with contractors.

HMRC have underestimated costs

The MPs state that the lack of data has made it difficult to disaggregate the direct impact of the reforms from other labour trends such as the effects of Brexit and the COVID-19 pandemic. HMRC underestimated the additional costs of implementing the reforms to hiring organisations, added the PAC report.

While the reforms appear to be bringing in more tax revenue, it is also clear to the PAC that structural problems remain with the way IR35 operates in practice. Hiring organisations cannot always get all the information needed to accurately assess a worker’s status, and it is too difficult for workers to challenge incorrect determinations as there is no independent appeals process. A lack of good data and legislative provisions in cases of non-compliance has also meant that HMRC ends up taxing the same income twice. This is of particular concern in the public sector where, if workers or their PSCs reclaim the taxes they already paid, the Government could end up subsidising private sector contractors for all of their tax.

HMRC need to demonstrate the system can operate effectively and fairly in the real world, and investigate whether the costs and unintended consequences are proportionate to the additional tax revenue which the reforms raise, said MPs on the PAC.

Problems with CEST

The MPs conclude that the high levels of non-compliance in central government reflect poor implementation by HMRC and other government bodies.

As well as the complaints of reforms rushed through, the report also highlights problems with the guidance and Check Employment Status for Tax (CEST) tool that HMRC provided. Some questions within CEST were difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself.

Employment status is a challenging area to get right, says the committee, saying that it is concerned that non-compliance in the public sector may be much more widespread than the instances HMRC have identified so far.

The MPs recommend that HMRC should develop robust estimates of non-compliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools. It should adopt a similar approach for the private sector as the reforms bed in and write to us with an update in six months’ time.

Too hard to challenge status determinations

The PAC is concerned that it is too difficult for workers to challenge incorrect status determinations. The MPs worry it is unclear how effectively appeal routes operate in practice and the extent to which they are used, because HMRC does not monitor this.

This leads PAC to recommend that HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. As part of this, it should assess the extent to which workers are using existing appeals routes, and how well they are working.

Do more to understand impact of the reforms

HMRC are not doing enough to understand the impact of the reforms on workers and labour markets, concludes the PAC.

The MPs call on the tax authority to conduct and publish specific research into the impacts of the IR35 reforms on contractors and labour markets, to check it is being applied as intended and not adversely affecting employment opportunities.

HMRC must work with affected sectors

The MPs are not confident that HMRC works proactively to establish whether any sectors have been affected disproportionately by the reforms and why. They have particular concerns around difficulties in implementing the rules raised by contractors in the broadcasting and IT sectors, and these issues may be compounded in areas that have seen changes to more flexible and ad-hoc working practices in recent years.

The PAC suggests HMRC should proactively identify and work with sectors that have been particularly affected to understand the challenges, establish how to address them and make it easier to comply. The committee has asked to HMRC write to it with an update in six months with the outcome of this public engagement.

No complete picture of the costs

The MPs find that HMRC have not made a robust assessment of the additional costs of implementing the reforms. There is no complete picture of the costs of the reforms against which the benefits could be compared, say the PAC.

HMRC’s modelling of the cost to hiring organisations works out at just £35 a year per personal service company (PSC), based on a theoretical minimum needed to comply. HMRC do not know what it actually costs all parts of the labour supply chain to administer the reforms in practice, the report states.

In light of actual experience, the PAC states that HMRC should produce and present to Parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain.

Structural problems with IR35 remain

The MPs conclude that despite years of reforming the IR35 rules, there are still structural problems with how they work in practice.

They say the IR35 rules do not work well with the realities of contracting, both in determining workers’ tax status and in resolving issues when mistakes have been made. While HMRC interprets IR35 as applying to individual engagements, recent court cases have focused more on a worker’s business in the round. The legal framework and realities of contracting also make it difficult to correct errors if HMRC later finds a hiring organisation to be non-compliant.

The PAC recommends HMRC review how the system is working and whether it can be made more efficient and effective. It should develop solutions to address problems with how the IR35 rules work in practice, including ensuring that the tax authority has the data it needs to accurately reflect each worker’s tax position in cases of non-compliance, and that HMRC does not end up taxing the same income twice, or unwittingly contributing to workers not paying their fair share in tax.~

The report is here.

By Hamant Verma, CIOT Senior External Relations Officer