Chartered Accountants & Business Growth Specialists

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Whitehall - Do as I say, not as I do.


Whitehall - Do as I say, not as I do.

No, not partygate, but IR35 Non Compliance.

IR35 is the legislation that stops employees trading through limited companies and shunting dividends to spouses, thereby saving income tax. 

The problem was partially solved by inventing dividend tax, with the forthcoming hike in Corporation Tax to 25% (from 19%) adding to the fun.  Due to low levels of compliance, HMRC tightened the rules, with the changes coming into effect in the public sector in 2017.  The new rules don’t apply to small companies.

In 2020-21 central government departments owed or are expected to owe £263 million in back taxes, due to the “incorrect administration” of the rules.  In a damning report, the Public Accounts Committee (PAC) said that the government departments’ failure to comply with the rules is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC.  

The committee also subjected HMRC to criticism, saying that the reforms were rushed and a lack of data makes it difficult for organisations to assess the tax status of new hires. It went on to say that the guidance provided was poor and that there's no means for a worker to appeal their tax status.    

HMRC responded by saying that the reforms have been successful in making the tax system fairer, with more people who work like employees paying tax like employees.  They also welcomed PAC’s acknowledgement that the 2017 reforms appeared to have brought in more tax revenue.  The approach helped HMRC to collect an additional £525 million of tax due in the first two years following the 2017 reforms.  

The damning report (titled "Lessons from implementing IR35 reforms") from the PAC was released on the 25th of May.