The government owes itself £263million in back taxes due to ‘non-compliance’ with its own IR35 reforms, according to a damning report.

A committee of MPs said HMRC had ‘rushed’ the implementation of new tax rules (IR35) for unpaid workers, leading to ‘widespread non-compliance’ which is ‘unacceptable’.

The Public Accounts Committee (PAC) said ‘government bodies should be best placed to understand the rules’, but in 2020/21 ‘it became clear that many central government departments were struggling to comply with the rules. reforms and owed or should owe HMRC £263million in back taxes.

Furthermore, he said HMRC had “done little to understand” the wider impact of reforms on workers, the labor market or particular sectors, and that it “underestimated the additional costs of implementing implementing reforms for hiring organizations”.

However, PAC noted that the reforms appear to be generating more tax revenue, but added that it is “clear that structural problems remain with the operation of the IR35”.

What is IR35 and what is the problem?

In 2017, reforms of tax rules for self-employment in the public sector were implemented, before being extended to the private and tertiary sector last year.

These tax rules – IR35 – apply to workers/freelancers/entrepreneurs who provide their services through their own limited liability company or other type of intermediary to a client, but who would otherwise be an “employee if the intermediary was not used.

Under the Finance Act 2000, HMRC’s aim was to prevent tax avoidance by these ‘disguised employees’, as estimates suggest it cost the Exchequer £440million in lost income in 2016/17.

In the first two years, at least 50,000 people were added to payroll systems and the net increase in tax revenue was £250 million.

But in the 2020/21 financial statements of government departments and agencies, it included a total of £263million paid, due or expected to be due in additional tax for failing to properly administer the reforms.

In February this year, a National Audit Office investigation suggested HMRC was facing ‘new risks and non-compliance’ which risked falling on employers.

At the time, he said: ‘HMRC’s current approach to correcting non-compliance allows it to collect more tax in total than is due, and it does not yet have a plan to remediate.”

Tax disputes have also arisen, and the NAO noted that while workers can challenge their tax status with the organization, “there is no clear legal route to appeal.”

This was echoed by PAC’s report today which said hiring organizations are unable to properly assess a worker’s status and the appeals process means it is too difficult for workers to challenge incorrect determinations. Furthermore, he said a ‘lack of good data and legislation’ has seen HMRC tax the same income twice: ‘a particular concern in the public sector where government can end up subsidizing private sector contractors for all of their taxes.

“Years of playing with these reforms”

MP Meg Hillier, chair of the PAC, said: ‘While gig economy workers have challenged their work and tax status in court, there is no recourse for workers deemed to be subject to the tax rules. IR35 despite the confusion and non-compliance that persists even within central government itself.

“After years of playing around with these reforms and with hundreds of millions of pounds spent by the central government to cover the tax of people wrongly considered self-employed, the fundamental issues underlying the taxation of labor in the UK United remain. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that they are correctly claiming income under the system and that the additional income generated is worth the costs and unintended labor market consequences.

An HMRC spokesperson said: “These reforms succeeded in making the tax system fairer, with more people working like employees paying taxes like employees, leveling the playing field for everyone else and introducing tax due under the law .

“We put in place an extensive program of education and support before the reforms took effect and we continued to adapt our approach to improve compliance and help organizations get it right.

“We welcome the PAC’s recognition that the reforms appear to generate more tax revenue.”