Government owes HMRC £263m after failing to comply with its own tax rules

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Whitehall departments owe HM Revenue & Customs hundreds of millions of pounds in unpaid taxes after the Government failed to comply with its own rules for off-payroll workers, a damning report has been found.

The Public Accounts Committee, a group of MPs, has lambasted central Government for “widespread non-compliance” with so-called IR35 rules, which require companies to determine the tax status of freelancers and contractors.

Public sector departments owed HMRC £236m in back-taxes for workers wrongly assessed as self-employed for the tax year 2020-21, the committee estimated.

It said: “Such widespread non-compliance is not acceptable, particularly as government bodies should be best placed to understand the rules and communicate with HMRC.”

But MPs said the issue had been made worse by the taxman “rushing implementation” of the IR35 rules and providing “poor guidance” with no means of appealing a tax status for workers.

The rules were originally introduced in 2000 to stop tax avoidance in the form of “disguised employees” gaming the system and working permanently in a company, without paying the same income tax or National Insurance as employees.

It used to be the case that off-payroll workers determined their own tax status under the IR35 rules, but recent reforms passed the responsibility instead to companies, who are now liable for any unpaid tax if HMRC finds they failed to comply with the rules.

These changes came into force for 50,000 contractors in the public sector in 2017 and more recently for 180,000 contractors in the private and third sectors in 2021. It has meant scores of freelancers have suffered after many businesses decided to stop working with contractors altogether, for fear of getting into a dispute with the tax authority.

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The Public Accounts Committee accused HMRC of having done “little to understand the wider impact of the reforms on workers or labor markets” and warned the taxman had been “too dismissive” of people and businesses reported being adversely affected by the rules.

Dame Meg Hillier, Labor MP and chairwoman of the committee, said: “After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain.

“It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labor market.”

She added: “While workers in the gig economy have challenged their work and tax status in the courts, there is no recourse for workers deemed subject to IR35 tax rules despite the confusion and non-compliance that persist even in central government itself.”

If a contractor or freelancer believes they have been given the incorrect tax status by a hiring company, they can challenge the decision with the business. The company must respond within 45 days, but if it refuses to change its mind the worker has no further route to appeal.

HMRC said: “These reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees, leveling the playing field for everybody else and bringing in the tax that is due under the law.”

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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