16 Feb 2022
The size and complexity of the private sector means that the extension of off-payroll rules, commonly known as IR35, makes compliance a problem for HMRC, the National Audit Office (NAO) has warned.
A NAO report said that labour markets in the private and third sectors are larger, which makes monitoring non-compliance a bigger challenge.
HMRC estimates that the 2021 extension of the reforms to the private sector will affect around 180,000 personal service companies (PSCs), almost four times the number affected by the 2017 public sector reforms. This creates a bigger challenge for HMRC to identify and monitor risks of non-compliance.
Complex supply chains are more common in the private and third sectors, creating a greater risk of companies making errors when determining tax status, and of the reforms resulting in workers changing careers or business moving overseas.
Gareth Davies, Head of the NAO, said: 'The 2017 reforms to IR35 tax rules have achieved their primary purpose of reducing non-compliance. However, HMRC did not give public bodies sufficient time to prepare for the roll-out, and it was highly likely that mistakes would be made.
'While key lessons were applied during the wider rollout in 2021, inherent differences in labour markets create new challenges that HMRC will need to manage for the reforms to be a success.'