Government slammed for ‘crazy’ IR35 responses to Public Accounts Committee

HMRC has responded to scathing findings on its IR35 rules by the Public Accounts Committee (PAC), albeit in a way contractors’ advisers are calling “crazy”.

In reply to May 2022's ‘Lessons from implementing IR35 reforms,’ the Treasury takes the confounding position of repeatedly disagreeing with the PAC’s conclusions but agreeing with its recommendations.

Except where it doesn’t.

On page 2, it says it “agrees with the committee’s recommendation” that HMRC should “develop robust estimates of non-compliance”, only to then say:

“[HMRC] does not agree that developing an overall estimate of non-compliance is the best way to achieve this outcome.”

'Full cost-benefit analysis of IR35 is impossible'

Similarly, on page 5 HMT claims it “agrees with the committee’s recommendation” that HMRC should produce and present to parliament a cost-benefit analysis of the reforms”.

But then a caveat: “HMRC does not believe it will be possible to publish a full cost-benefit analysis taking account of all parties in the supply chain”.

It represents a new, unorthodox, frustrating way to respond to criticisms of HMRC and IR35, says a former tax official, who was once asked by the Treasury to simplify the legislation.

'Crazy'

“The government has ‘agreed’ with every recommendation [on IR35] made with a massive ‘BUT,’” begins the ex-Treasury secondee, Kate Cottrell, previously of the Revenue and now of Bauer & Cottrell. 

The status specialist continued to ContractorUK :“The government then lists numerous things they have done already, or are about to do [with the off-payroll rules], and for the most part, seem to disagree with the conclusions of the PAC. 

“So apparently you can agree with a recommendation but wholly disagree with the conclusion reached. What a crazy position.”

'Pointless exercise'

Another tax expert who also used to inspect for the Revenue Carolyn Walsh, says maybe it is industry stakeholders who are the insane ones.

Boss at CWC Solutions, she writes today on ContractorUK: “We see yet again that if you ask the same questions of HMRC, you get the same answers, resulting in a pointless exercise.”

With HMRC saying it will again do a review and research, notably into the PAC’s concerns like IR35’s impact on workers (by December 2023), no wonder it’s déjà vu, says Seb Maley.

'HMRC dodges the key problems'

“It’s a disappointing, predictable response that we’ve seen far too often from the government whenever it’s pressed on IR35,” said Mr Maley, CEO of IR35 contract review firm Qdos.

Off-payroll.org founder James Poyser agrees.

Last night, he told ContractorUK: “It is the usual frustrating read. Yet another committee finds issues with IR35, and yet again HMRC dodges some of the key problems.

“Nobody has confronted the fact that assessments simply aren't happening. Many end-clients don't want to entertain the risk and hassle that is the off-payroll legislation, and simply force the self-employed onto PAYE via umbrella companies.” 

'Inherent flaws in IR35 unaddressed'

Walsh, in her ContractorUK exclusive today suggests that part of the problem may be the PAC’s brief, as it was only asked to come up with lessons to learn from IR35 reform.

So while that means implementation of the April 2017 and 2021 rules was within their remit, the committee’s MPs could not probe the “inherent flaws in the legislation” as a whole.

At 2.2 of its response, the government states the “best result” for workers, engagers and the exchequer is “where employment status is treated correctly from the start.”

'Clients need to start assessing employment status'

“For this ambition to be realised,” endorses Mr Poyser, a chartered accountant, “end-clients need to start assessing employment status, rather than forcing people onto PAYE.

“The questions HMRC needs to ask of end-clients are; ‘Why do you have so many workers employed via umbrella companies?’ and, ‘Have they all had their employment status assessed individually?’"

Boss of inniAccounts, he added: “And then HMRC needs to ask itself a question, ‘If they haven’t [had individual assessments] how can we as HMRC help make that happen?’

“Of course, HMRC aren't incentivised to do so. Having everyone on PAYE is far more convenient and generates greater tax revenue -- at the cost of taxpayers overpaying.”

'Red herring'

To be taxed correctly, Walsh today advocates IR35-affected taxpayers using their self-assessment returns to go against ‘inside’ determinations that they disagree with.

It is an IR35 challenge route that Lucy Frazer as financial secretary to the Treasury deemed inappropriate (she has since been replaced by Andrew Griffith MP, a former COO of Sky).

It is also a route that Mr Poyser isn’t a fan of despite the government response to the PAC flagging it up at 2.4 as a statutory “right” that contractors can use.

 “Challenging IR35 status via self-assessment is an outrageous red herring,” the accountant said in a statement.

“And HMRC needs pulling up on this, pronto. If HMRC are not challenged and made to explain the shortcomings of this, there's a risk they'll say it's working as only a handful of people have disputed their status.”

'Don't hold your breath'

 But there’s a risk to the Revenue too.

One of its former tax inspectors Ms Cottrell explains “The government response to the PAC says HMRC will report back on IR35 reform’s impact on workers in December 2023.

“While that means don’t hold your breath, I do wonder whether the timing of this particular date is in fact a coincidence or designed to fall after the Supreme Court has ruled on the PGMOL referees case and the MOO issue, which could of course blow HMRC’s CEST tool totally out of the water and undermine most of the off-payroll rules.”   

'Just carry on'

Asked if there is any advice or guidance for contractors and others concerned by IR35 in light of what she derided as the government’s "crazy" response to the PAC, the Bauer & Cottrell co-founder added: “It seems that any investigation [into the off-payroll rules], be it by the House of Lords, the PAC or anyone else raising legitimate problems [with the framework], will simply be ignored.  

“So my message to contractors is to just carry on. Make sure you have taken ‘reasonable care’ to get your IR35 status right and then a bit like HMRC and HM Treasury, you too can be confident -- whatever happens.”