Two government departments have recently unveiled they face a combined tax bill of over £120 million due to IR35 status errors. The Department for Environment, Food & Rural Affairs (Defra) and the Ministry of Justice (MoJ) used CEST, the government’s IR35 status tool, to determine the IR35 status of their temporary workforce. Unfortunately, the tool appears to have failed. Keep reading, and we will explain why Defra and the MoJ face such heavy tax bills from the government.
The Department for Environment, Food & Rural Affairs (Defra) and the Ministry of Justice (MoJ) have been handed substantial tax bills from HMRC because of failings associated with identifying the IR35 status of temporary workers.
In the annual reports for both companies, Defra confirms they have a tax liability of £48 million, and the MoJ owe over £72 million. To make matters worse, the MoJ has been hit with an additional £15 million penalty because HMRC believes they were ‘careless’ when carrying out tax status reviews (IR35).
The tax bills that both Defra and the MoJ face showcases HMRC’s commitment to reclaim underpaid tax from companies accused of inaccurately assessing the IR35 status of temporary workers. However, it’s a worrying state of affairs for businesses trying to make sense of the complicated world of IR35.
Since the changes to off-payroll in the public and private sectors, businesses have proven it’s challenging to assess employment statuses accurately. Now that Defra and the MoJ have been presented with tax bills by the government for inaccurate IR35 status assessments, the total number of government departments that have been given tax bills is five. The other departments hit with bills are The Department of Health (DoH), The Department for Work and Pensions (DWP) and the Home Office.
Since the introduction of the government’s IR35 status tool called Check employment status for tax (CEST), it has faced criticism from a magnitude of stakeholders. CEST has often been labelled inaccurate, difficult to use and not a reliable tool for determining the IR35 status of temporary workers.
In response to the tax bills sent to Defra and the MoJ, Dave Chaplin, IR35 specialist and CEO of IR35 Shield, shared his thoughts. Chaplin said on ContractorCalculator:
“Defra and the MoJ are two of the largest Government organisations and would undoubtedly have received considerable help from HMRC for implementing the Off-payroll reforms correctly. They also committed to using HMRC’s Check Employment Status for Tax (CEST) tool and followed HMRC guidance”.
“HMRC provided the advice and guidance and populated the minds of those conducting the assessments, yet HMRC is now claiming their ‘customers’ are effectively negligent. It’s beyond belief”.
“For a tool of such importance, the supposed lack of rigour involved in its testing methodology is astonishing”.
Defra’s liability “now stands at £48 million”
In Defra’s Annual Report and Accounts 2020-21, the government department acknowledges “inaccuracies in the historic assessment of some contractor’s employment status”. The report states:
“The department [Defra] has re-assessed the status of all Defra contractors in light of these inaccuracies. A reliable estimate has been calculated for the amount Defra owe to settle the tax liability for all current contractors whose IR35 assessments have changed due to these reassessments. The work done on reassessments has decreased the proportion of contractors outside IR35 from 85 per cent to 22 per cent of all current contractors. This revised percentage has been applied over the remainder of the population of contractors who are no longer with the department to obtain an estimated tax liability for this population.”
The report also explains the liability that Defra is responsible for:
“Since the 31 March 2021, work on reassessing contractor’s IR35 statuses has continued. This has led to additional contractors being reassessed as inside IR35. In addition to this, some of the assumptions made in the initial calculation have recently been clarified with HMRC, which will also affect the liability. The remaining liability now stands at £48 million, based on 6 per cent of contractors remaining outside IR35. The provision remains based on 22 per cent being outside IR35 as this was the position at 31 March 2021.”
Defra’s report confirms “work is continuing to agree the final liability with HMRC”.
HMRC brands the Ministry of Justice as ‘careless’ in its interpretation of off-payroll working rules
In the MoJ’s Annual Report and Accounts 2020‑21, it’s unveiled that £72.1 million is payable to HMRC “in relation to IR35 liabilities arising from incorrect assessments of the employment status of workers”.
The report states:
“In 2019, HMRC challenged the MoJ to revisit employment status determinations for off-payroll workers engaged between 6 April 2017 and 5 April 2020, where we had previously concluded workers were operating outside of the off-payroll working rules”.
As well as the significant tax bill, the MoJ faces a substantial penalty of £15 million because “HMRC found that the department had been ‘careless’ in its application of the off-payroll working rules”.
The MoJ’s report confirms the additional “penalty has been suspended for 3 months subject to certain conditions and is therefore not included within the losses total”.
Existing regulations are “complicated and confusing”
Andy Chamberlain, The Directory of Policy at IPSE (The Association of Independent Professionals and the Self-Employed), shared his thoughts on the latest IR35 errors from government departments. He said:
“The fact that two major government departments have run into trouble with their IR35 compliance show just how complicated and confusing the regulations are. Even with guidance, support and training from HMRC, the MoJ and Defra have not made accurate status determinations. For private sector organisations that aren’t as connected to HMRC, they will almost certainly find it equally challenging.
The revelations that these huge tax bills are owed prompt a further question: has tax already been paid on these engagements? If it has, then HMRC is in danger of collecting too much tax, which is against its own principles. IPSE is calling for an offset mechanism to be introduced to ensure that double taxation cannot incur.”
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