IR35 in the public sector – HMRC criticised

The National Audit Office (NAO) has published its report on the rollout of IR35 reforms to tax rules for off-payroll working in the public sector.

Readers may recall that this happened in 2017 (as distinct from the extension of the reforms to the private and third sectors in 2021). For Bectu members, this primarily means that IR35 affected freelancers working for the BBC initially (the BBC being an ’emanation of the state’ in this respect), but hit the bulk of freelance members who work in the private sector in April 2021.

The key points in the report are that

  • the aim of reducing non-compliance with a duty to determine tax status was achieved, thereby increasing tax revenue
  • the 2017 reforms were rushed – public bodies had little time to prepare
  • the original CEST guidance tool wasn’t up to scratch (our recollection is that it actually got worse before it got better)
  • the estimate for how long it would take for engages to get it right was on the low side
  • … so some public bodies made mistakes

The 2021 roll-out is reported to have learned a lot of these lessons though… (quoting from the exec summary – my emphasis)

“Questions remain about the system for addressing incorrect determinations, with routes of appeal untested and tax burdens in cases of non-compliance likely to fall on employers. There are also differences between the public and private sectors that increase the inherent challenges.

HMRC faces new risks that will make it harder to identify, monitor and address non‑compliance, including larger and more complex labour markets in the private sector. HMRC will need to manage these risks if it is to ensure the reforms are successful.”

The bit I’ve highlighted here is, I suspect, a conclusion that lots of engagers are pushing people into complex Umbrella-type intermediaries which will further cloud the issue, and explain the 2021 HMRC initiative to discourage misuse of complex intermediaries.

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