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Organisations found IR35 reforms easy to follow, says HMRC

HM Revenue & Customs (HMRC) reports on the impact of IR35 off-payroll reform have found that most organisations found it easy to comply.

Published 15 December, the reports include commissioned research and HMRC analysis of the expected impact of 2021’s off-payroll IR35 reform in the private and voluntary sectors.

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In the commissioned IFF Research report, half (50%) of group-level organisations, part of larger groups which handle the administration of off-payroll contractors for all or multiple establishments in the group, said they found it quite easy or very easy to comply with the off-payroll working rules.

More than a quarter (29%) reported finding it difficult.

Similar results were seen in establishment-level organisations which handle off-payroll administration themselves.

Around half (48%) of these organisations found it quite easy or very easy to comply with the reform, while a quarter found it difficult (24%).

Despite the reported ease of the process Seb Maley, CEO at tax consultancy Qdos, criticised the government for underplaying its challenges and potentially putting HR at risk of non-compliance.

Speaking to HR magazine, Maley said: “This report is yet another study from the government which plays down the impact that IR35 reform has had on businesses, recruitment agencies and contractors.”

Use of HMRC’s free Check Employment Status for Tax (CEST) tool and in-house expertise and reliance on contractors was credited with helping firms smoothly navigate IR35.

Difficulties arose where there were perceived ‘grey areas’ in the legislation; cases where off-payroll contractors operated in highly skilled and regulated professions and in complex cases where CEST could not be used to determine a person’s status.

Maley added: “The findings relating to HMRC’s IR35 tool, CEST, are a cause for concern.

“CEST was cited by businesses as one of the factors that made complying with the off-payroll rules easy. But CEST isn’t fit for purpose. True, it’s a simple test but that’s one of its failings.

“The tool is deeply flawed and HR teams shouldn’t rely on it to determine IR35 status. Rather than ensuring compliance, it puts compliance at risk."

There are various flaws HR should be wary of, Maley added.

He said: "CEST’s failings have been well documented over the years – whether that’s its inability to determine IR35 status around 20% of the time, the fact that it doesn’t fully align with IR35 case law or that HMRC themselves won’t necessarily stand by a determination made by the tool.

"These fundamental flaws – plus many others – are why HR departments shouldn’t rely on CEST to determine the IR35 status of contractors engaged.”

Up to March 2022, IR35 off-payroll reform is estimated to have generated an additional £1.8 billion in tax revenue for HMRC.

The department said it will use the findings of the reports to help provide better support for organisations which find it more challenging to comply with the rules.

This may include improvements to the CEST tool.

The commissioned IFF Research report on the short-term impacts of the 2021 off-payroll working rules reform on private and voluntary sector organisations can be found here.

HMRC’s own analysis of the reform can be found here.