The UK government has published its response to a report from the Public Accounts Committee, the ‘Lessons from implementing IR35 reforms’ report.

In its report published in May 2022, the Committee concluded that ‘High levels of non-compliance in central government reflect poor implementation by HMRC and other government bodies.’

It recommended that the HMRC should develop robust estimates of noncompliance for the public sector as a whole and use this to identify areas where it can reduce the inherent challenge of complying with the reforms, for example by improving its guidance and tools. ‘It should adopt a similar approach for the private sector as the reforms bed in and write to us with an update in six months’ time,’ the report stated.

The government said it agrees with this recommendation. However, it added that it disagrees with the Committee’s conclusion.

“HMRC will expand its work to obtain customer insight, for example by collating outcomes from its existing compliance work to identify common issues, and by building on existing engagement with representative bodies and via the department’s network of customer compliance managers. It will consider what additional customer support is required depending on the outcome of this work. This may include, for example, updates to guidance or targeted communications,” HMRC stated.

In the Committee’s report, it said it was concerned that it is too difficult for workers to challenge incorrect status determinations and recommended that the HMRC should ensure there is a fast and independent process for contractors to resolve disputes over status determinations. ‘As part of this, it should assess the extent to which workers are using existing appeals routes, and how well they are working’, it stated.

The government agreed with the Committee’s recommendation and targeted December 2023 as an implementation date. “The best result for workers, engagers and the Exchequer is where employment status is treated correctly from the start,” it stated. “The government remains confident that the reforms to the off-payroll working rules were the best way to achieve this.” The HMRC also stated that there are established appeal routes for customers who disagree with tax assessments.

According to the Committee, the HMRC is not doing enough to understand the impact of the reforms on workers and labour markets and recommended that the HMRC should conduct and publish specific research into the impacts of the IR35 reforms on contractors and labour markets, to check it is being applied as intended and not adversely affecting employment opportunities.

The government agreed with the Committee’s recommendation, but disagreed with the Committee’s conclusion. “The government has already published research on the short and long-term impacts of the public sector reform and is committed to publishing research on the impacts of the reform in the private and voluntary sectors later this year,” it stated.

Another conclusion drawn from the Committee’s report is that it is not confident that HMRC works proactively to establish whether any sectors have been affected disproportionately by the reforms and why. It recommended that the HMRC should proactively identify and work with sectors that have been particularly affected to understand the challenges, establish how to address them and make it easier to comply. “HMRC should write to us with an update in six months with the outcome of this public engagement,” it added. The government agreed.

The government also agreed with the Committee’s conclusion that the HMRC has not made a robust assessment of the additional costs of implementing the reforms. The Committee said that in light of actual experience, HMRC should produce and present to Parliament a cost-benefit analysis of the reforms that reflects the actual costs of compliance to HMRC itself, hiring organisations, workers, and others in the supply chain.

“Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice,” the Committee also stated in its report, adding that the HMRC should review how the system is working and whether it can be made more efficient and effective. The government agreed with the Committee’s recommendation with a target implementation date to be confirmed.

Dave Chaplin, CEO of tax compliance firm IR35 Shield said, “The government’s comments claiming there are ‘appeal routes' is impractical nonsense and highlights the impediment to natural justice inherent in the IR35 Reform.”

Seb Maley, CEO of IR35 expert Qdos, said, “The Public Accounts Committee provided a damning assessment of IR35 reform, with the report calling on HMRC to make changes to these flawed rules. And while HMRC has agreed with the recommendations made, the tax office is merely promising to review and research these issues further. “

“Ultimately, this response lacks a concrete promise to resolve several of the fundamental issues resulting directly from the introduction of IR35 reform, whether that’s to ensure contractors have a fair shot at overturning unfair IR35 determinations or to give businesses every chance to comply with the rules,” Maley said. “It’s a disappointing, albeit predictable, response that we’ve seen far too often from the government whenever it’s pressed on IR35.”