RSM UK warns public money may subsidise private contractors amid potential IR35 reform issues
Following the publication of the House of Commons Committee of Public Accounts paper, ‘Lessons from implementing IR35 reforms’ Susan Ball, tax partner, people advisory services, RSM UK said: ‘It’s encouraging to see this report recommends HMRC reviews the rules to ensure there is a fast and independent appeals process, the same income is not taxed twice, and HMRC does not unwittingly contribute to workers avoiding paying their fair share of tax. Currently there are no off-set provisions in the IR35 Off Payroll rules, and no clear definition of ‘self-employed’, which means there is a risk that tax could be paid twice on the same money. This was also raised in the recent NAO report. Despite this, the government does not appear inclined to provide organisations with any greater clarity through a combined employment legal and employment tax status test any time soon. We must hope it is addressed as part of the review announced earlier this month in The Future of Work Review.
‘At the moment if an organisation makes an incorrect decision on the tax status of a self-employed worker, while they will be liable, the tax rules allow any tax they have already paid on the same income to be off-set. This means the risk and compliance burden on operating the rules is less than when engaging workers via an intermediary, such as a personal service company. The IR35 rules shifted the balance of this risk.
‘In law, under the current IR35 rules HMRC must collect the full taxes that should originally have been paid by the hiring organisation. This means that HMRC collects tax twice on the same income, and that workers are able to reclaim all the taxes they paid previously, without needing to compensate the hiring organisation. Consequently, where this occurs in the public sector, they may end up paying all the tax on workers mistakenly assessed as self-employed. HMRC doesn’t know how much this is happening, or to what extent the public purse is effectively subsidising private contractors.
‘HMRC estimates that the cost of IR35 compliance to hiring organisations is just £35 a year per contractor. The report says HMRC should present to parliament a cost-benefit analysis of the reforms that reflect the actual costs. This is good news, as organisations have long said the administrative burden of introducing new processes and procedures to comply with the rules and demonstrate reasonable care in operating them is significant, and more than HMRC estimates.’