Cost of IR35 non-compliance to reach £1.2bn

Government makes further suggestions of IR35 reform to private sector

The Government recently responded to a question put forward by Conservative MP Jeremy Quin, concerning the effects on IR35 compliance within both the public and private sector. The question asked what assessment has been made of the recent reforms to off-payroll working in the public sector and the effects of non-compliance concerning off payroll working in the private sector.

Rather unsurprisingly, the response provided by Mel Stride, Financial Secretary to the Treasury, indicated that the changes to IR35 in the public sector have been a resounding success and that “around 90,000 additional new engagements occurred in the public sector above the level that would normally be expected.” The response goes on to say that this meets the Government’s expectations in that more individuals are being taxed as employees and, “is consistent with the government’s expectations that the reforms would increase tax compliance in the public sector.”

Estimated tax losses to reach £1.2billion

Mel Stride commented that non-compliance in the private sector is increasing, stating that recent estimates suggest tax losses to the Exchequer will grow to £1.2 billion a year by 2022/23.  With the Autumn Budget just around the corner on 22 November, could this be a sign that the Government are intending to introduce the off-payroll reform into the private sector? Many professionals, including Qdos, have predicted that this could happen as early as 2018.

This coincides with HMRC’s comments in the latest IR35 Forum, held on 17 July, where a member asked if the recent reforms would be extended to the private sector. HMRC commented by stating that whilst the focus is on establishing IR35 reform within the public sector, they do ‘of course’ want to see an improvement on compliance within the private sector.

HMRC continue to misunderstand contractors

An article written for People HR Magazine recently by Jim Harra, HMRC’s tax assurance commissioner and director general for customer strategy and tax design, also paints a picture of complete non-compliance in the public sector, with contractors wrongly declaring themselves as outside of IR35 for years and depriving public services, such as schools and hospitals of hundreds of millions of pounds.

Much of the Government’s announcements surrounding non-compliance have been heavily criticised by many contractor groups, including Jim Harra’s comments, for failing to consider the whole picture.  The notes of the latest IR35 Forum were slated by many of its members for failing to record their concerns regarding the reforms, such as an increasing difficulty to fill contractor roles within the public sector, along with an increased cost for specialist skills.

Further evidence that reform will be extended

In an interview with the Financial Times, Mel Stride commented that the private sector should not be able to continue unchecked and that it is as much a matter of fairness between the public and private sectors, as it is about collecting tax.

Although the Government’s comments have been heavily criticised, it does give them the impetus to introduce reform into the private sector and finally align the IR35 rules. All of the recent media surrounding public sector reform and supposed non-compliance in the private sector suggests that now could be the time the Government intend to do it.