IR35 tech compliance will take private sector 'over a year' to achieve, warns accounting trade body

Back-office software suppliers will need at least a full tax year to make their systems IR35 compliant, if plans to extend the tax avoidance reforms for the private sector are waved through, warns The Association of Accounting Technicians (AAT).

The organisation, which represents the interests of vocational accountants, is cautioning HM Revenue & Customs (HMRC) against extending the IR35 reforms to the private sector on the grounds there is insufficient evidence to back claims that a similar move has benefited the public sector.

“There remains an absence of robust, independent evidence to evaluate the effectiveness of off-payroll working in the public sector. However, there is a plethora of anecdotal evidence from a wide range of sources that suggests it is not operating effectively,” the organisation said, in its response to HMRC’s consultation on extending the IR35 reforms to the private sector, seen by Computer Weekly.

“It should therefore not be extended to the private sector until there is robust, independent evidence of its effectiveness.”

If, however, the government does decide to pursue such a move, the AAT said it can ill-afford to rush the changes through.

“Off-payroll working in the private sector is far greater than in the public sector, and any extension will therefore be considerably more challenging,” the AAT consultation response document continues.

“The private sector faces an unprecedented level of change which commenced with auto-enrolment, wage rises and the apprenticeship levy, and continues with the requirements of Making Tax Digital, dealing with disruptive technologies and, of course, the impact of Brexit. The timing, including sufficient lead-in time, is of the utmost importance.”

This is particularly when it comes to ensuring the back-office IT systems and support staff the private sector will need to rely on to meet the requirements of the reforms are ready for any changes that may occur.

“Businesses must be given sufficient time to prepare for any changes that are recommended because of this consultation,” the AAT added. “Suppliers of third-party employment and contractor-related software will require at least one complete tax year, and large businesses up to two tax years, to deliver the systems changes required to meet compliance requirements. In addition, key staff members will need to undergo specialist training.”

The organisation further claims in its consultation response that the 20-year-old IR35 regulations are also out of step with how the modern labour market operates, and the government should be considering alternative means of curbing tax avoidance in the private sector.

“The employment intermediary legislation commonly referred to as IR35 is nearly twenty years old, [and] has consistently failed to resolve the wholesale non-compliance it was put in place to address,” the organisation said.

“A holistic review of employment law and taxes is urgently required. With employment rights cases being found in favour of the workers and three recent First Tier Tribunal decisions rendering conflicting outcomes, the time is right for closer alignment that adequately reflects the proliferation of flexible working practices.”

The Association for Independent Professionals and the Self-Employed (IPSE) made a similar point to Computer Weekly during an interview in preparation for the consultation ending on Friday 10 August, saying the government should stop “tinkering with IR35” and embrace new ideas that could achieve the same result.

According to HMRC’s own calculations, the cost of non-compliance on IR35 in the private sector is around £700m at present, and is forecast to increase to £1.2bn by 2022-23 unless action is taken to address the issue.

The aim of the consultation is to see if making it the responsibility of the organisations that engage with contractors to decide how they should be taxed is likely to help improve IR35 compliance, as HMRC claims it has in the public sector since similar measures were introduced in April 2017.

Previously, it was the contractors’ responsibility to self-declare their tax status, and decide if the nature of the work they do means they should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35).