The National Audit Office (NAO) has recently published a new report which investigates the impact of IR35 on the public sector, in particular Government departments and agencies – and the findings are damming.

In fact, careful examination of the report summarises that IR35 was a rushed initiative that was based on inaccurate and inflated HMRC estimates on the loss of taxable income via contractor and business engagements.

What’s more, it failed to appreciate the cost and administration burdens of the new legislation and was backed by an ineffective compliance tool, CEST.

This probably isn’t surprising to those who have been affected by IR35 but most worryingly the NAO study suggests that HMRC’s tax calculations are incorrect, and it is sometimes collecting more than is due.

Up until now, it has been revealed that seven public sector bodies have failed to comply with IR35, landing them with penalties and a tax bill of £263million in total.

This only gives a small glimpse at the problems created by IR35 and doesn’t take into consideration it’s impact on the private sector.

Clearly, if Government agencies are struggling to get it right, how can businesses be expected to follow the rules.

In fact, the problem may be worse than many realise, as the NAO report shows that out of 59 investigation cases, HMRC did not pursue and closed 24 because they were at “low risk of non-compliance”.

The reasons for this decision are unknown but would clearly be helpful to the private sector, which is still getting to grips with this legislation.

Perhaps because of this latest report, it is now being recommended that HMRC publishes what it thinks is good implementation practice for IR35 to help it’s public sector colleagues.

Looking further into the report, it appears that HMRC is also out of touch with the realities of IR35.

As an example, at one point, it is revealed that HMRC estimates that the time spent by most organisations to complete the IR35 process includes:

• 30 minutes – 1 hour to run CEST
• 30 minutes to deal with the “undetermined” results

So, at most, HMRC believes that organisations will only require an hour and a half to complete the process without the apparent need for an advisor or potential conflict that may arise from effectively changing someone’s employment and potential income.

Unsurprisingly, several experts have pointed out the incredible lack of understanding of the commercial realities of contracting.

In comparison, HMRC has said that should a matter require investigation, it estimates that this will take on average two years for it to investigate and come to a decision on the matter.

The NAO’s report was focused on the public sector, but HMRC admits that it expects the private sector to face the same challenges and mistakes that have plagued public bodies.