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Top 10 IR35 stories of 2022

The implementation of the UK government’s IR35 reforms has continued to generate headlines for Computer Weekly in 2022

The extension of the IR35 reforms to the private sector in April 2021 came coupled with a promise that for the first 12 months the government would be taking a “light-touch” approach to enforcing the rules.

For this reason, one might have been forgiven for thinking 2022 would be something of a quiet year for news where IR35-related matters were concerned, as medium-to-large private sector enterprises got to grips with their new-found responsibilities.

However, nothing could be further from the truth, with the reforms being the subject of several parliamentary reports in 2022 criticising their roll-out in the public sector in April 2017, while further details of public sector organisations facing multimillion-pound tax bills for non-compliance also emerged.

As was the case when the reforms came into force in the public sector, the private sector roll-out also saw more contractors finding themselves working through umbrella companies for the first time, which also brought a fresh wave of problems for them too.

Here are Computer Weekly’s top 10 IR35 stories of 2022.

1. Umbrella companies targeted by cyber attackers

The year got off to a shaky start for thousands of IT contractors after two sizeable umbrella companies found their systems under attack from suspected ransomware-touting cyber criminals in January 2022.

Contractors working for the two affected companies, Parasol and Brookson, went without pay for several weeks after the suspected ransomware attack and complained of running into difficulties when trying to contact the firms to chase payments in the wake of the incidents.

2. Umbrella company Parasol hit by ransomware-related data breach

Contractors working for Parasol were hit by another blow in February 2022, when the company confirmed it was investigating details of a data breach linked to the suspected ransomware attack on its systems.

This was after the company had moved to assure its contractors that no personal data was extracted during the January 2022 cyber attack. However, an investigation by a law firm tasked with overseeing a group action to support contractors affected by the breach reportedly found “at least” 350,000 records linked to Parasol on the dark web.

3. HMRC bats away claims it ‘over collects’ tax from non-compliant public sector bodies

HMRC came under fire in February 2022 for failing to notify contractors working for public sector bodies of their entitlement to reclaim certain taxes they had paid in the past if the organisation they worked for had failed to implement the IR35 rules correctly.

The matter was brought to light by a National Audit Office (NAO) report into HMRC’s handling of the roll-out of the IR35 reforms in the public sector, which claimed that HMRC – when calculating how much tax these offending public bodies should pay – was failing to take into account the corporation or dividend tax contractors working for them would have already paid.

This, in turn, led to accusations that HMRC is over-collecting tax – something the government tax collection agency vehemently denies.  

4. HMRC blamed for wide-scale non-compliance with IR35 rules in public sector

The roll-out of the IR35 reforms in the public sector continued to garner parliamentary scrutiny in 2022, despite happening five years ago, with a 60-page report by the National Audit Office (NAO) slamming HMRC for its “haphazard” handling of it.

This is the reason why, the report continued, so many public sector bodies have fallen foul of the rules and been forced to cough up millions of pounds in unpaid tax to HMRC during the intervening years.

5. PAC slams HMRC over handling of the public sector roll-out of IR35 reforms

The scale of non-compliance with public sector IR35 rules was laid bare by a report in May 2022 by the Public Accounts Committee that confirmed, at that point, central government departments had ended up collectively owing HMRC £236m in back taxes.

Once again, HMRC and its handling of the the roll-out of the reforms in the public sector was savaged in the report, which stated: “HMRC rushed the implementation of the reforms, provided poor guidance and public bodies struggled with its tools to assess status.”   

6. Tech consultancies shut out of public sector contracts over IR35 compliance concerns

The spate of stories about public sector organisations finding themselves on the receiving end of multimillion-pound tax bills after making IR35 compliance errors has led to tech-focused small and medium-sized enterprises being shut out of government contracts, it was claimed in June 2022.

Speaking to Computer Weekly, Romy Hughes, director of private and public sector digital transformation consultancy Brightman, claimed some government departments had tweaked their hiring policies and were enforcing bans on the use of consultancies to avoid having to carry out IR35 status determinations and – in turn – risk falling foul of the rules.

7. HMRC commits to IR35 review in wake of complaints

HMRC confirmed in September 2022 that it would review the way the IR35 off-payroll working legislation works in response to the Public Accounts Committee’s criticisms, particularly its claims there are “structural problems” with how the tax avoidance rules work in the public sector.

It also promised to revise the processes it has in place for contractors who have cause to challenge their IR35 status determinations.

8. Government commits to repealing IR35 reforms before U-turning

In his first and last financial statement as chancellor of the exchequer, Kwasi Kwarteng shocked the contracting community in September 2022 by announcing a plan by the government to repeal the controversial IR35 tax avoidance reforms in the public and private sectors from 6 April 2023.

While the news was warmly welcomed by the IT contractor community, their joy was to be short-lived, as the decision was rolled back several weeks later after many of the other measures announced by Kwarteng during his mini-budget led to the value of the pound falling to an all-time low.

9. Defra’s IR35 compliance bill ends up higher than expected

Many of the aforementioned IR35-related tax bills that central government departments receive are unfinalised amounts, as HMRC’s compliance investigations into their adherence to the IR35 legislation remain ongoing, but departments are still expected to declare any potential settlements in their annual accounts.   

As a result, the initial amount the department sets aside for their IR35 settlements sometimes needs to be revised up, as is the case with the Department for Environment, Food and Rural Affairs (Defra).

When the organisation published its annual accounts in October 2022, it said it had an outstanding liability of £63.2m, but the final settlement figure was still to be worked out. It has since emerged that it paid £86.5m to HMRC for IR35 compliance errors.

10. HMRC embarks on tax avoidance enforcement action against contractors using IR35-adjacent legislation

Also this year, HMRC stood accused of using some IR35-adjacent legislation, known as the managed service company legislation, to mount a large-scale tax grab on IT contractors.

The government tax collection agency launched enforcement action on the clients of at least two accountancy firms that specialise in the provision of services to limited company contractors, resulting in them being hit with five-figure tax bills.

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