Continued criticism for HMRC as PAC says IR35 deters companies from engaging contractors

In another damning report, the UK government’s Public Accounts Committee (PAC) has expressed deep concern over HMRC’s performance in the 2022-23 fiscal year.  The handling of IR35 / the Off-Payroll rules came under significant scrutiny in the report yet again, with the PAC expressing worry that HMRC’s approach to tackling IR35 is actively “deterring legitimate economic activity,” and that a lack of confidence in applying the rules is discouraging companies from using contractors.

Fairness in focus: PAC probes HMRC’s approach to IR35 cases

In the report, released on 28^th February 2024, the PAC further probed HMRC on the fairness and proportionality of pursuing IR35 cases through the courts. In response, HMRC stated that some litigation is inevitable and emphasised its commitment to resolving disputes through agreement. Despite a claim of rare litigation occurrences, the committee noted 22 cases have been heard at the first-tier tribunal since 2017.

The PAC has recommended that HMRC provides them with information on the number of active litigation cases for IR35, the amount of tax at risk and to assess the impact of its approach on the use of contractors in different sectors.

Concerns over HMRC’s aggressive enforcement and customer service levels

There were serious concerns raised about the balance between civil and criminal prosecutions by HMRC.  There has been a significant drop in criminal prosecutions by HMRC, raising concerns that this sends the wrong message about tackling serious abuse. This runs concurrently with increased efforts to challenge individuals in court over their employment status, and the PAC has urged HMRC to strike a balance between the two.

The report also placed scrutiny on HMRC’s customer service levels which “are at an all-time low”, with the tax authority appearing to be struggling to cope with the rising taxpayer population and the increasing complexity of its own tax legislation.  Notably, 62.7% of callers waited more than 10 minutes to speak to an adviser in 2022-23, up from 46.3% in the previous year.

Will we see any change?

The welcome report echoes the sentiments widely shared within the contracting sector, and contributes to the growing body of evidence that the Off-Payroll rules are not fit for purpose, challenging to enforce fairly, and impose excessive administrative burdens on both organisations and contractors. With the Spring Budget on Wednesday, there is always hope that these concerns might be addressed but failing that, the only recourse at this stage appears to be the next General Election, prompting a “wait and see” approach.