Investigation into the implementation of IR35 reforms

The National Audit Office (NAO) has published its report on lessons to be learnt from the implementation of the reforms to the IR35 legislation for off-payroll working arrangements in the public sector.

The legislation was introduced in 2000 to prevent workers from avoiding the deduction of PAYE and Class 1 National Insurance by working through a personal service company. The first significant changes to the rules were introduced in 2017, as they related to the public sector, with the requirement to oversee the compliance obligations passing from the personal service company to the client, or agency who was responsible for making the payments. Further changes then followed for the public sector, which came into effect from April 2021.

Whilst the administrative responsibilities have passed on to the client, the underlying rules for determining the deemed employment status have not!

The report has highlighted the following key findings:

• HMRC have seen an increase in tax revenues and the number of workers deemed to be employed for tax purposes
• There is no clear legal route to appeal deemed employment status determinations
• HMRC may have underestimated the cost to employers on implementing the reforms
• Despite improvements, Inherent differences between the public and private sectors mean that HMRC faces new and challenging risks following wider implementation of IR35 reforms.

Unsurprisingly, several recommendations have been made where HMRC should:

• Further develop the ‘check employment status tool’ (CEST), together with any supporting guidance to make its use easier and allow for more accurate out-puts
• Assess the usefulness of CEST for different sectors
• Provide examples of good implementation to promote compliance by helping organisations get determinations and tax deductions right first time
• Update its estimate of compliance costs to hiring organisations based on actual experience, to help all parties within the worker supply-chain
• Build on its improved collaboration with stakeholders to enable constructive discussions and pre-empt challenges in the public and private sectors.

Client action points

Whilst the NAO report considers the impact on the public sector changes, any organisation who is engaging workers outside of the payroll must consider the IR35 legislation with a degree of urgency.

Recent tribunal decisions, which consider the facts of the specific case under review, are providing different and often conflicting outcomes. It is therefore imperative that not only are the contractual arrangements reviewed, but also the policies and procedures surrounding the contractor process.

For further information, please contact Nick Bustin, or a member of the Employment Tax team at haysmacintyre.