The government has published its response to a Public Accounts Committee review of changes made to off-payroll legislation – also known as IR35.
The PAC published its second report on IR35 reforms in May this year, concluding that organisations do not always have the data available to make accurate decisions about whether a worker is inside or outside IR35 for the purposes of tax and national insurance.
Changes to IR35 came into force for the public sector in 2017 and the private sector in 2021. They shift the responsibility for determining a contractor’s employment status for tax purposes onto the organisation, rather than the individual.
The aim is to stamp out “disguised employment”, where businesses use contractors’ services akin to how they work with employees but do not pay the same levels of tax or national insurance.
However, the introduction of the reforms has attracted criticism from employers and contractors alike, with a number of government departments themselves falling foul of the rules.
HM Revenue & Customs has now issued a response to the concerns raised by the committee, effectively ruling out greater alignment between tax status and employment rights.
In the response, the government states that while it recognises “there could be some benefits to greater alignment between the two systems”, “now is not the right time to bring forward proposals for alignment between the two frameworks.”
This would mean that contractors operating inside IR35 – which means they pay the same levels of tax and national insurance as salaried employees – will not be granted the same employment rights as their permanent colleagues.
However, in the run-up to the Conservative leadership vote, which closes today (2 September), candidate Liz Truss pledged to review off-payroll regulations if she becomes the next Prime Minister.
In an interview with The Sun on Sunday last week, Truss said: “The changes that have been made to IR35 are all about trying to treat the self-employed the same as big business.
“But the fact is, if you’re self-employed, you don’t get the same benefits as being in a big company. You don’t get paid holidays, you don’t get those benefits. So the tax system should reflect that more.”
Seb Maley, CEO of IR35 insurance provider Qdos, said the government’s response to the PAC’s criticisms was “predictable”.
He 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.
“It’s a disappointing – albeit predictable – response that we’ve seen far too often from the government whenever it’s pressed on IR35.”
One recommendation the government agreed to proceed with was that HMRC runs a cost-benefit analysis of introducing the reforms.
HMRC said it would investigate how much organisations had spent in order to comply with the reforms by December 2023.
It also conceded there had been “structural problems” with how the regulations work in practice, including obtaining the relevant data for worker status decisions, and committed to looking into this.
Dave Chaplin, CEO of tax compliance firm IR35 Shield, said the response included “both positives and negatives”.
“It is very disappointing to read in the opening paragraph a legally incorrect comment by Government when stating that disguised employees are ‘…people who do the same job in the same manner as an employee’. This is either ignorant of the law, a deliberate misrepresentation, or ironically highlights that Government doesn’t understand the complexities of status law,” he said.
“There is nothing in the common law on status that refers to ‘same job’ or ‘same manner’. Status law is concerned with the nature of how someone is engaged and seeks to ascertain whether it is a commercial agreement (for services) or employment (of service).
“If the test was as simple as needing to find someone else doing the same job in the same manner, then cases would not need to go to the Supreme Court, and neither would HMRC need to publish reams of guidance.”