HMRC ‘suppresses growth’ by avoiding contractors outside IR35 in last year

It is the “height of hypocrisy” that HMRC has not engaged with any contractors outside of the IR35 legislation in the past year, according to Dave Chaplin, CEO at IR35 Shield.   

In its annual report and accounts published on 28th July, HMRC revealed that it had not recruited any contractors outside the scope of the IR35 legislation between 2022 and 2023, despite employing 980 off-payroll workers. 

Chaplin says that HMRC deeming all its contractors as employees goes against their public guidance. 

“ [HMRC’s own guidance] clearly states that firms are not exercising reasonable care if they “determine that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case.

“It appears to be a case of do as we say, not as we do.”  

Seb Maley, CEO at IR35 specialist consultancy firm Qdos, echoes the view that HMRC’s employment practices are “hypocritical”, arguing that this paints a damning picture of how the tax authority has handled the enforcement of the off-payroll working rules.  

“It’s no secret that many businesses have needlessly stopped engaging contractors because of the off-payroll working rules. But instead of leading by example and showing others that these rules are perfectly manageable, HMRC is insisting that all contractors work on the payroll. This is hardly leading by example.”   

HMRC is “wasting” taxpayer’s money   

The HMRC report highlighted that the majority of its contractors were engaged via an umbrella company, earning a minimum of £245 a day.   

“I don’t know what’s worse, HMRC’s attitude or the fact that forcing genuine contractors to work PAYE is a much more expensive way to engage flexible workers. So along with impacting contractors, HMRC is wasting taxpayers’ money,” Maley adds.   

Similarly, Chaplin argues that HMRC has made a mistake by restricting its access to potential talent with its blanket rule. 

He says HMRC “shot the private sector in both feet” when the rules were rolled out in 2021, arguing that ”levelling the playing field shouldn’t mean injuring everyone the same”.    

“We are supposed to be promoting growth, but all they’ve done is suppress it,” Chaplin adds.  

IR35 must be addressed by next election  

In March 2023, HMRC announced the launch of a consultation on the IR35 off-payroll working rules, with a view to eradicate the “massive problem” of double taxation. 

With this consultation now over, Chaplin believes the Conservative Party must address the legislation with action before the forthcoming general election. 

“Don’t forget, HMRC convinced the Conservatives to push this measure through, and underestimated the impact. It’s now a politically toxic issue for the Conservatives.”   

R&D relief a bigger problem than previously thought   

Also included in HMRC’s annual report was the updated estimate of the overall level of error and fraud for both R&D reliefs in 2020-21, with the figure reportedly jumping from £336m to £1.13bn.     

Ellen Milner, director of public policy at the Chartered Institute of Taxation, believes the figures indicate the problem is worse than first thought, and HMRC is right to prioritise tackling it. 

“We, and our members, want bad R&D claims rooted out, but as it stands, it appears that HMRC do not have the systems in place to differentiate good from bad. 

 “Too many genuine claimants are embroiled in a rigid and uncompromising compliance process in order to defend their R&D tax relief claim, and are reconsidering using the scheme altogether as the costs of enquiry outweigh the benefits of claiming the relief.” 

This perspective is shared by Jenny Tragner, director and head of policy at R&D tax relief consultancy, ForrestBrown.   

“More detail on the causes of non-compliance is essential if HMRC is to form an effective strategy to address the problem.  

HMRC has poured new resources into compliance activity, however more work is needed to ensure businesses have access to clear and accurate guidance, and to minimise complexity in the scheme itself.”