HM Revenue & Customs (HMRC) has hit back at claims it is wasting taxpayers’ money by not hiring contractors on an outside IR35 basis, after its annual accounts suggested the majority of the temporary workers it used last year were engaged via umbrella companies.
According to the government tax collection agency’s 2022-2023 Annual Report and Accounts, which documents HMRC’s performance during the 12 months to 31 March 2023, the organisation engaged a total of 1,096 temporary off-payroll workers during this period.
The bulk (980) of these off-payroll workers were engaged by HMRC, while 108 completed work for the agency’s Revenue and Customs Digital Technology Services (RCDTS) arm and the remainder were on hire to the Valuation Office Agency (VOA).
Out of the 1,096 contractors engaged by HMRC and its divisions, the vast majority (1,037) of these engagements were listed as being not subject to the IR35 off-payroll legislation. Meanwhile, the remaining 59 were classified as being inside IR35, while none were found to be working outside IR35.
These figures have been seized on by IR35 compliance firm Qdos as evidence that HMRC may be operating a blanket ban on outside IR35 contractors, given the figures suggest the majority of its temporary workers are engaged via Pay-As-You-Earn (PAYE) umbrella companies.
If this is the case, Qdos CEO Seb Maley said it smacks of hypocrisy. “On one hand, the tax office tells businesses that this reform will have little impact. Then when it comes to it, HMRC has banned contractors. It’s hypocritical – a case of ‘do as I say, not as I do’,” he said.
HMRC has overseen the roll-out of reforms to the way the IR35 rules operate in the private and public sector since April 2017, as part of a clampdown on tax avoidance within the contracting sector.
These changes have seen contractors cede responsibility for determining if they should be taxed in the same way as salaried workers (inside IR35) or off-payroll employees (outside IR35) to the end-user organisations that engage them, whereas previously it was up to the contractors to decide their tax status for themselves.
According to HMRC, this system of self-declaration had been subject to abuse, with some contractors opting to deliberately misclassify themselves as being outside IR35 to artificially minimise the amount of employment-related tax they must pay.
However, the shift in responsibility has left some private and public sector organisations with a sizeable, additional administrative burden that has prompted many of them to cease using contractors entirely or opting to only use those that are engaged via umbrella companies.
“It’s no secret that many businesses have needlessly stopped engaging contractors because of the off-payroll working rules. But instead of leading by example and showing others that these rules are perfectly manageable, HMRC is insisting that all contractors work on the payroll,” said Maley.
“I don’t know what’s worse, HMRC’s attitude or the fact that forcing genuine contractors to work PAYE is a much more expensive way to engage flexible workers. So, along with impacting contractors, HMRC is wasting taxpayers’ money.”
When Computer Weekly put this statement to HMRC, a spokesperson for the organisation hit back at the suggestion it had a contractor ban of any kind in place.
“It is plain wrong to claim we have banned contractors, which is clearly shown by our continued use of outside contractors,” the spokesperson said.
“We apply the off-payroll rules in the same way as we expect other organisations to, ensuring the correct tax is paid.
“These reforms have levelled the playing field, ensuring those who work like employees pay tax like employees. There is no evidence that the reforms have had any significant impact on the overall demand and supply of labour, with those impacted making up less than 1% of the total workforce,” the spokesperson added.
This is the second time in recent years HMRC has faced down accusations of operating a hiring ban on contractors, after the publication of its 2020-2021 accounts revealed a similarly low number of contractors engaged on an outside IR35 basis.
