Cost of IR35 changes to employers could be higher than expected, says NAO

Government spending watchdog report finds potential need for ‘significant investment’ and says CEST tool can be further improved

The government underestimated the cost to employers of changes to IR35 off-payroll rules, UK’s public spending watchdog has said.

In a report published yesterday (10 February) the National Audit Office (NAO) said that when the changes to the private sector came into force in 2021, the government “expected new administrative burdens… to be small”.

However, the watchdog said that best practice from the public sector – which saw the changes introduced much earlier – suggested that “significant investment may be needed” by employers into contracting organisations, independent review structures and approval policies to ensure their organisations remain compliant.

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“Public bodies we interviewed explained that in some cases a lot of staff time had to be put into administration and ongoing compliance work,” the report said.

It added that not only were public sector organisations forced to “dedicate a lot of ongoing resource” to making employment status determinations. but that many had difficulties in finding contractors or found that contractor fees had increased.

Under IR35, contractors whose relationship with a company resembles that of an employee’s are required to have the same taxes deducted from their earnings as an employee. The rule was first introduced in 2000 to ensure that workers who carry out similar jobs pay broadly the same level of income tax and national insurance contributions.

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Initially, contractors were required to declare whether they were affected by the legislation, but in 2017 the rules were changed for the public sector to put that responsibility on the organisations working with the contractors. Last year the same change was rolled out for the public sector.

In its report, the NAO also said more could be done to improve the HMRC’s Check Employment Status for Tax (CEST) tool, first introduced in 2017 to help public sector bodies make status determinations.

The much-criticised tool was updated in 2019, however the NAO said that while most found the changes welcome and useful, more could be done to make the tool easier to use accurately.

This was echoed by a separate letter to the government, also published yesterday, from the House of Lords Economic Affairs Finance Bill Sub-Committee, which urged the government to “take a more coherent approach to the issue of employment status” that considers both tax status and employment rights.

“It is unfair for individuals to be treated as employees for tax purposes without having employment rights,” said Lord Bridges, who chairs the committee.

Commenting on the results, Tania Bowers, global public policy director at APSCo, said she welcomed suggestions that the CEST tool needed to be updated. “It’s our view that an overhaul of employment status law in tax and rights is essential and that it needs to be fit for a 21st-century labour market,” she said.