Following the Public Accounts Committee's report on IR35 compliance (May 2022), HMRC are under pressure to reform the IR35 legislation and guidance.
IR35 was broadly introduced to prevent employees from taking advantage of the income tax and national insurance benefits designed for self-employed consultants. It applies when an individual provides services to a client through a third party (such as a personal service company), but the individual would be regarded as an employee had the services been provided directly. Where applicable, IR35 treats the service fee as income, subject to income tax and NICs under the PAYE system.
Since the implementation of IR35 in 2000, there have been various attempts by the government to tighten and amend the rules to prevent individuals from underpaying income tax (whether intentionally or otherwise):
- In April 2017, public authorities became responsible to determine their workers' employment status for tax purposes.
- In April 2021, all public authorities, as well as medium and large sized private businesses took on such responsibility for their workers (as discussed here).
Despite the numerous changes, there has been an influx of "disguised employees" and HMRC are taking prompt measures to recoup unpaid tax.
The May 2022 Report identifies a number of concerns surrounding the lack of regard shown to the rules, including:
- poor implementation by HMRC and other government bodies;
- the complexity of the rules making it “too difficult” for workers to challenge incorrect status determinations; and
- HMRC “not doing enough” to understand the impact of the reforms on workers and labour markets.
HMRC has confirmed that the recommendations highlighted in the Report will be taken on board, with a target implementation date of December 2023.
Despite the increased scrutiny of HMRC’s approach, it remains prudent for workers to ensure they are taking proactive measures to reach the correct determination of their employment status. Whilst this is an area that has historically been subject to confusion and non-compliance, it is imperative for workers to be aware of the tools available to make a correct status determination, and to utilise their right to challenge and appeal determinations where appropriate.