As HMRC’s soft-landing ends for the new off-payroll working rules — known as IR35 — organizations should heed the potential warnings from the recent review of IR35 in the public sector released by the National Audit Office (NAO) and the recent House of Lords enquiry.

Learnings from the public sector. The NAO report “Investigation into the implementation of IR35 tax reforms” is far more balanced than HMRC’s recent attempt to mark its own homework. It also provides some very helpful learnings for how the new rules can be better managed in the private sector.

First, HMRC has recouped £100 million more than expected in tax receipts, which suggests that many public sector organizations placed more workers inside IR35 than was really necessary. This is a practice that private sector businesses would be advised to avoid in the current competitive environment for attracting and retaining contractor talent.

Second was the report’s coverage of HMRC’s Check Employment Status for Tax tool (CEST), with it clear that historic errors in use of the tool resulted in public bodies being penalized and handed significant tax bills. Although the House of Lords report goes into further detail on the challenges around CEST, the NAO’s recommendation is that appropriate training is put in place by businesses in order to fully understand HMRC’s guidance. As ever, any automated tool is only as accurate as the information fed into it.

Finally, the NAO report recognized that HMRC massively underestimated the ongoing commitment required by organizations to maintain IR35 compliance, with dedicated staff, independent review structures and formal approval at senior levels recommended as best practice. While this may seem onerous, it will allow businesses to unlock one of the key advantages of centralizing responsibility for engaging with off-payroll workers: a more holistic view of status determinations both internally and in the supply chain. Organizations that follow this advice stand to benefit from improved access to a flexible workforce, while keeping a tighter rein on costs and compliance.

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Limitations of CEST. The House of Lords enquiry makes clear that CEST should not be a substitute for law, so companies that use the tool should understand their legal responsibilities for reasonable care and how to use CEST in this context. However, until we see an enforcement case come to court, there is currently little legal precedent for how these new rules should be applied, and CEST still appears to be the inaccurate yardstick by which compliance in the public sector is being measured.

The House of Lords recommendation to introduce mutuality of obligation considerations into the tool will be a great help, but only if, as outlined in the NAO report, people using the tool are fully trained and able to clearly interpret the rules.

Blanket bans. The House of Lords report recommends the HMRC to police the use of blanket bans – where contractors are put onto a payroll without assessing IR35 status – and blanket assessments – where a hirer deems all engagements as outside IR35. In a recent Brookson Legal survey of 500 business leaders responsible for IR35 –  Reassessing IR35: The unspoken opportunity for growth report – 25% of companies we spoke to indicated that they had used a blanket approach to status determinations. Whether HMRC heeds this advice or not, we would advise these companies to review this practice urgently to avoid losing out on talent to companies who are able to offer outside IR35 roles for the more skilled roles in their flexible workforce.

Looking forward. The House of Lords committee recommends the findings of the 2017 Taylor review be implemented more fully, which we support. A healthy economy needs a tax framework that enables access to flexible workforces for businesses, while valuing the vital contribution that genuine contractors make and the financial independence that they require in order to work effectively in this way.

The NAO’s and House of Lords’ IR35 reports provide useful learnings and food for thought for the private sector as it embarks into the next phase of its IR35 journey. Only by heeding the warnings surrounding reliance on CEST and blanket bans will organizations be able to recruit and retain talented contractors, and embed a compliant and robust IR35 solution that supports business growth.

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