Exploring three major reports into the impact of IR35 reform
The arrival of IR35 reform in both the public and private sectors was met with criticism and disapproval from contractors, along with the businesses engaging and placing these workers.
First introduced in 2017 in the public sector, before similar changes were rolled out in the private sector in 2021, IR35 reform saw the responsibility for determining IR35 status transfer from the contractor to the business engaging them. As part of this change, the IR35 liability shifted from the contractor to the fee-paying party in the supply chain.
But how has reform impacted the way businesses engage contractors? Can HMRC’s IR35 tool, CEST, be relied on to accurately determine IR35 status? And are so-called ‘blanket determinations’ as widespread as reported?
From being described as ‘minimal’ to ‘damaging’, three new reports published already this year outline the various impacts of IR35 reform.
In this article, we round-up the key findings…
HMRC commissioned IFF Research and Frontier Economics to look into the long-term impact of the IR35 reform on public bodies.
The study, ‘Long-term effects of the Off-Payroll working rules reform for public sector organisations’, looks to paint a positive picture. It claims the impact of the changes was minimal – a view that few contractors would agree with and one that contradicts the £263m worth of IR35 bills issued to government departments due to non-compliance.
At a glance, the main takeaways from this report were:
- Almost two-thirds of central government bodies and individual public authority sites reported no change in the number of contractors engaged outside IR35 between 2017 and 2020.
- The report claims that just 1% of public sector organisations were found to have made blanket determinations.
- Half of those surveyed did not use any information provided by HMRC or a third party to ensure their IR35 compliance.
As our CEO, Seb Maley, explained to The Register: “This study suggests the impact of IR35 reform in the public sector was minimal, despite there being plenty of evidence out there to contradict this.
“It even goes as far to say that nearly half of public sector bodies have not assessed any contractors inside IR35 whatsoever. While a welcoming statistic, I’m taking it with a pinch of salt – blanket IR35 determinations were commonplace in the public sector.”
National Audit Office (NAO) investigation
The National Audit Office (NAO) also carried out an ‘Investigation into the implementation of IR35 tax reforms’, again focusing on the implications of public sector changes.
However, in large part, this comprehensive 60-page report is at odds with the one commissioned by HMRC. The NAO is highly critical of the government for giving public sector organisations “little time to prepare”, which made it “highly likely” that mistakes would be made.
Key findings from this investigation included:
- HMRC’s CEST tool initially failed to make an IR35 determination in 15% of cases. This figure rose to 20% after it was reportedly improved in 2019.
- There’s no legal route for contractors to overturn a client’s IR35 decision, which has made it difficult to challenge unfair status determinations.
- Despite penalising central government departments for non-compliance and not taking reasonable care to prevent errors, HMRC had not set out how it would interpret ‘reasonable care’.
- HMRC doesn’t offset the tax already paid by a contractor when collecting tax liability owed by businesses for incorrect IR35 decisions. This results in the tax office receiving more money than it’s owed – an issue Qdos highlighted to the Financial Times recently.
Reflecting on the report, Seb told Computer Weekly: “Private sector businesses can learn a lot from this investigation. It makes clear that CEST should not be relied on to assess IR35 status and that HMRC has no hesitation in issuing staggering tax bills for non-compliance, evidenced by the £263m owned by public sector bodies.”
Finance bill sub-committee inquiry
The third review into IR35 reform was published on 9th February by the Finance Bill Sub-Committee and examined IR35 reform in the private sector. Titled ‘Off-payroll working follow-up inquiry’, this report builds on the findings from the investigation into the proposals for private sector reform in 2020.
Like the NAO report, it makes a host of recommendations, drawing attention to a number of flaws in the government’s plan for IR35 reform.
The committee found:
- CEST was repeatedly described as “not fit for purpose” by businesses, contractors and industry experts.
- HMRC claimed that CEST was designed to deal with 80% of IR35 cases, but the committee criticised this saying that still left a significant number of businesses and contractors in limbo. “More must be done to improve” this, it said.
- The trend in blanket determinations has continued since the introduction of the reform in the private sector and “tougher compliance action is needed.”
- Contractors placed inside IR35 pay employment tax, but have zero employment rights. The government was urged to address the issue if it’s “truly committed to fairness in the workplace.”
To conclude, despite HMRC’s insistence, IR35 reform has clearly had a major impact on this sector, creating challenges for businesses engaging contractors.
For more information and to hear how Qdos is helping thousands of organisations with their ongoing IR35 compliance, please call us on 0116 478 3390 or email our team at [email protected].