‘Fundamental problems’ with the taxation of UK work remain after IR35 reform
The government has been criticised for spending years “fiddling” with IR35 reform only for the “fundamental problems” underlying the taxation of work in the UK to remain.
This was one of a number of key findings from the highly critical review of IR35 reform, conducted by the Public Accounts Committee (PAC) in May.
In a statement released alongside the report, ‘Lessons from implementing IR35 reforms’, Dame Meg Hillier MP, Chair of the Public Accounts Committee, slammed the government for its failings.
“After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain.”
Current position not ‘sustainable’
The report itself explored this point in more detail, stating: “Despite years of reforming the IR35 rules, there are still structural problems with how they work in practice.”
It alluded to the legislation not working “well with the realities of contracting, both in determining workers’ tax status and resolving issues when mistakes have been made.”
The latter point was in reference to another key takeaway from the report – that the existing legal framework makes it difficult for contractors to successfully challenge an incorrect status determination made by clients, who are now responsible for status assessments following reform in the public and private sectors.
The PAC wrote that “this position does not look sustainable and risks being more costly to all parties the longer it goes on.”
HMRC slammed for double-taxing IR35
Along with citing concerns that hirers often lack the information required to make accurate status assessments, the fact that HMRC ‘double-taxes’ IR35 did not go unnoticed by the PAC, which wrote:
“The legislative framework does not allow HMRC to offset liabilities against taxes already paid, meaning it collects tax twice on the same income and workers become able to reclaim all the tax they paid.”
This has been brought to light before, with experts asking why HMRC doesn’t take into account the Income Tax and Corporation Tax already paid by a contractor on an outside IR35 engagement which the tax office then deems inside IR35.
Andy Chamberlain of IPSE described this aspect of the rules as a “ludicrous anomaly” that highlights the “absurdity of the IR35 changes.”
Previously in response, the tax office said that contractors may be entitled to reclaim tax if their client has made an incorrect IR35 determination, which places them outside the scope of the legislation.
HMRC urged to ‘address problems’
That HMRC must make it easier for contractors to overturn incorrect IR35 decisions and stop double-taxing IR35 under the new rules are just two of many recommendations made by the PAC, that urged the tax office to carry out a review into how the existing system is working, exploring ways it could be made more “efficient and effective.”
You can read the full PAC report into IR35 reform on the parliamentary website.