HMRC Taken to Task Over Flawed IR35 Reform Implementation


The Public Accounts Committee (PAC) has delivered a scathing review of HM Revenue & Customs (HMRC) implementation of reforms to the IR35 off-payroll working rules. In the Committee Report, published on 28 February 2024, covering “HMRC performance in 2022–23”, the cross-party group of MPs expressed serious concerns that HMRC’s tough approach to IR35 is deterring legitimate economic activity and unnecessarily deterring companies from using contractors.


The Committee has recommended that HMRC provide the Committee with the number of active litigation cases for IR35 and the amount of tax at risk and assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.


The Report stems from a Public Accounts hearing on 14 December 2023, which scrutinized HMRC’s performance. Jim Harra, Permanent Secretary and Chief Executive, HMRC, defended the tax authority’s administration of policies like IR35, but his claims did not withstand scrutiny.


Dave Chaplin, CEO of tax compliance firm IR35 Shield, who provided evidence to the hearing, says: “Despite Mr Harra’s attempts to brush away the Committee’s IR35 concerns, the Committee saw through his defensive rhetoric, which included multiple factually incorrect claims. HMRC now must act because taxpayers are not being treated fairly, which is a clear breach of the legally binding HMRC Charter.”

Misaligned HMRC Guidance and Tools Create “Bad Policing” of IR35


Chaplin says: “A major issue is that HMRC’s IR35 guidance and online tools do not align with up-to-date case law, leading to inaccurate status assessments by HMRC caseworkers, who are then issuing tax bills based on the application of their own rule book, and not the correct legal principles.”


The Report states that HMRC told PAC that it has been using litigation through the courts to test the employment status rules and may need to update its guidance and tools based on the courts’ judgements.


“Harra is right, “says Chaplin, “But the Court of Appeal fully clarified the employment status rules on 22 April 2022 in the landmark case of Atholl House, which described HMRC’s approach as ‘myopic’. Despite two years passing, HMRC has not updated its guidance. In every IR35 hearing since the Atholl House ruling, HMRC’s own barristers and taxpayers have relied on the binding law from the Court of Appeal. Still, the clarified legal principles have not yet made it into HMRC’s guidelines.”


Proof of HMRC’s outdated guidance in its Employment Status Manual (ESM) in ESM4130, which applies to TV and Radio Presenters. The page contains a false claim that it was last updated on 02 November 2023. The guidance is years out of date, stating: “There are two appeals pending which have the potential to impact this guidance, Kickabout Productions Ltd and Atholl House Productions Ltd. Both cases will be heard at the Court of Appeal – the hearings are expected in 2022 as such this guidance will be updated once we have the results of those cases or any other relevant judgements.”


Chaplin says: “The disparity between the guidelines, including HMRC’s Check Employment Status for Tax tool, and the current law is the kernel of the problem, leading to false accusations by tax inspectors that people have cheated on their tax.”


Worryingly, HMRC has been aware of this issue for over three years, since the House of Lords was alerted to the issue on 06 December 2021, when Alice Jefferies from the CBI provided oral evidence and told the Lords’ “where HMRC guidance and case law are not in alignment, either because HMRC’s view on something does not align with case law or because it has not been updated—the guidance tends not to be updated on a particularly regular basis for case law outcomes—businesses are left in the position where they are told that if they take this to court they will get one outcome, but HMRC is saying that it can rely on another outcome.”


The result of HMRC misapplying the law, says Chaplin, is that “We now have a ‘bad policing’ problem with IR35, where the IR35 tax police have effectively written their own rule book, and are not following the law, leaving taxpayers with the only option of appealing to an expensive tax tribunal, which many cannot afford.


“IR35 tax cases are notoriously complex, demonstrated by the fact that in the last 24 IR35 tax tribunal hearings, HMRC has fielded barristers in all cases, except two – a fact that contradicts Mr Harra’s claim in Oral Evidence to the PAC that in most hearings HMRC do not use legal Counsel.”


Without updated guidance and proper oversight, contractors must endure stressful and costly tax tribunals to overturn unfounded allegations.

HMRC Statistics Found “Untrue”


Also under fire was Mr Harra’s use of IR35 statistics that proved erroneous. Harra claimed HMRC had won 70% of tribunal cases, but the objective fact is that since 2017, tax tribunal cases have been evenly split.


Alarmingly, Mr Harra also claimed in his oral evidence that, in most cases, barristers were not used by HMRC in the IR35 tax hearings, an objectively false claim. Since the Christa Ackroyd case in February 2018, there have been 28 hearings, and HMRC has used expensive legal counsel in all but three.


Mr Harra claimed that HMRC always “reviews” HMRC’s Check Employment Status for Tax (CEST) tool after tribunal rulings, which contradicts what Mr Harra told the Committee on 04 March 2019 – then, Harra said: “We continually update the tool as new tribunal and court decisions are made about employment status, as well as continually increasing its scope so that it can respond to more and more types of cases… It is an ongoing, unending process.”


Harra’s promise almost four years ago was false. The decision engine in CEST has not been updated since 24 October 2019, despite over twenty IR35 tax tribunal decisions being published.


The PAC also expressed concern about HMRC’s tough approach to litigation. Mr Harra had wrongly told the Committee that most litigation does not go past the First-tier tax tribunal. His claim was untrue – HMRC has appealed every single case they have lost since April 2019.


After Mr Harra made his false claims to Parliament, ContractorCalculator submitted an FOI request and obtained a copy of the IR35 briefing papers Mr Harra relied upon when he gave evidence on 14 Dec 2022. Mysteriously, none of the false claims made by Mr Harra came from his brief. Chaplin says: “The claim he made on 04 March 2019 was untrue, and the more recent false claims appear to be plucked out of the air because they were not provided to him in his brief. He appears to be making it up as he goes along, to protect the reputation of HMRC rather than being truthful to Ministers – rather reminiscent of recent events involving the Post Office.”

Recommendations – what’s next?


In recommendation number 4, the Committee stated that they were concerned that HMRC’s approach to serious abuse is not deterring criminal activity sufficiently, while at the same time, its approach to tackling IR35 is deterring legitimate economic activity.


The Committee expressed its concerns that a lack of confidence in how to apply the IR35 rules, together with HMRC’s tough approach when taxpayers make mistakes, is deterring companies from using contractors unnecessarily and made three recommendations:

  • Provide to the Committee further detail of the value of tax at stake in cases of criminal prosecutions in recent years and further explanation of how HMRC is using fewer prosecutions to achieve greater deterrence of egregious non-compliance;
  • Provide to the Committee the number of active litigation cases for IR35 and the amount of tax at risk and
  • Assess the impact of HMRC’s approach to administering IR35 reforms on the use of contractors in different sectors.


Chaplin says: “Until HMRC updates its guidance and tools to reflect current case law, firms and contractors will face further accusations founded on invented rather than actual tax violations, which is a clear breach of HMRC’s Charter, which states that taxpayers should be treated fairly. Applying their own rules and not the law can hardly be considered ‘fair.’


“For now, HMRC can act as judge, jury, and executioner, using rules misaligned to the law. If the police behaved that way, the Crown Prosecution Service (CPS) would throw the cases out. Regrettably, we do not have independent oversight of HMRC, which is why so many taxpayers are being wrongly accused of being in scope of the IR35 rules. Parliament needs to intervene and we need a Taxpayer Bill of Rights.”

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