HMRC has opened its long-awaited private sector consultation to tackle non-compliance with the IR35 reform. Last year in the Autumn Budget 2017, the government had hinted that it would discuss the problem of non-compliance of the IR35 reform or off-payroll working rules in the private sector.

According to estimates by the HMRC, only 10 percent of personal service companies comply with the legislation. The cost to the government due to non-compliance with tax legislation is reckoned to be about £700 million in 2017/18. This amount is estimated to increase to £1.2 billion in the next five years if no action is taken in this regard.

The IR35 was introduced in the year 2000 to ensure that independent contractors who offer services through a third party or umbrella company but work like an employee pay taxes like regular employees.

Previously independent contractors were required to report whether their work come under IR35. But after the introduction of the IR35 reform in April last year, the responsibility of ensuring compliance with tax rules had shifted from contractors to recruitment agencies or public bodies that hire services of the contractor. This was intended to increase the revenue by £185 million.

Due to financial difficulties faced by the introduction of IR35 reform, a lot of public sector independent contractors particularly those related to the IT sector had decided to move to the private sector. Some departments had to increase the day rates in order to retain skilled staff.

The HMRC is now keen to extend the IR35 reform that has attracted a lot of criticism to the private sector. Having said that, the department has stressed that no final decision has been taken in this regard.

According to a spokesperson of the HMRC, the government has not made any decision to extend tax reform. At the moment, the government is only considering how the IR35 reform has affected the public sector and how it will impact individuals and businesses in the UK.

But the spokesperson also added that evidence shows that the reform has been highly effective in addressing the issue of non-compliance with IR35 reform or off-payroll working rules. This means that it’s highly likely that the reform will be extended to the private sector. If the IR35 rule is extended to the private sector, nearly two million or one-third of private sector employees could be affected.