The UK’s reforms last year to transform the way freelance contractors are hired by private sector businesses has led to “widespread non-compliance” even across public bodies, as government departments and agencies owe HMRC £263m.

The Public Accounts Committee said “widespread non-compliance” with IR35 tax reforms in central government departments is “not acceptable” after HMRC “rushed implementation of the reforms; provided poor guidance; and public bodies struggled with its tool to assess status”.

Several central government departments have struggled to comply with the reforms and owed or expect to owe HM Revenue & Customs (HMRC) £263m in back-taxes.

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The committee said mistakes were likely as the reforms were rushed in by HMRC and public bodies were given little time to prepare – in particular, they had only two months or less with HMRC’s new guidance and tools before the new rules came into effect.

Meg Hillier, chair of the Public Accounts Committee, said: “While workers in the gig economy have challenged their work and tax status in the courts, there is no recourse for workers deemed subject to IR35 tax rules despite the confusion and non-compliance that persist even in central government itself.

“After years of fiddling with these reforms and with central government spending hundreds of millions of pounds to cover tax for individuals wrongly assessed as self-employed, the fundamental problems underlying UK taxation of work remain. It is now up to HMRC to demonstrate that the system can work fairly in the real world; to prove that it is correctly claiming revenues under the system and that the additional revenues raised are worth the costs and unintended consequences in the labour market.”

Changes to the rules, known as IR35, were brought into the private sector in April 2021, following a rollout to the public sector in 2017. They shifted responsibility for assessing the employment tax status of freelance workers from the individual to the organisation hiring them. The measure was introduced to tackle tax avoidance from so-called ‘disguised employees’.

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These are contractors who work like regular employees but, because they use a limited company, can gain an advantage by paying corporate rather than employment taxes.

The use of umbrella companies, which act as an intermediary between contractors and clients in the supply chain for payroll purposes, has grown significantly since IR35 reforms were introduced for the private sector in April 2021.

HM Revenue & Customs estimated that 100,000 people worked through umbrella companies in 2007-08. By 2020-21 it estimated a fivefold increase to at least 500,000.

The committee also said that the absence of a clear definition of self-employment, and limited access to relevant personal information for each contractor, makes it challenging for hiring organisations to make status determinations confidently.

An HMRC spokesperson told Yahoo Finance UK: “These reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees, levelling the playing field for everybody else and bringing in the tax that is due under the law.

“We delivered an extensive programme of education and support before the reforms took effect and we have continued to adapt our approach to improve compliance with the rules and support organisations to get things right.”

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