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zebra laughing | accountingweb | ‘Laughing stock’ public sector racks up £300m in IR35 bills
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IR35 bills of £300m make joke of public sector

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The government has bilked more than £300m in IR35 bills from its own departments after UK Research & Innovation became the latest public body to be hit with a collection notice.

1st Jun 2023
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UK Research & Innovation (UKRI) owes £36m for a breach of off-payroll working rules, after disclosing in its annual report for 2021/21 that HMRC said it had misclassified contractors’ IR35 status.

The non-governmental body is sponsored by the Department for Science, Innovation and Technology (DSIT) and used a broad mix of off-payroll expertise for various projects.

Reforms to how contractors, sole traders and other non-permanent staff are paid entered force in 2017, but the public sector is still struggling to remain compliant.

HM Courts & Tribunals Service was told to pay back £12.5m to HMRC last year, with similar bills landing on the desks of the Department of Work and Pensions (£88m) and the Home Office (£33.5m).

UKRI made no official response, but IR35 expert Dave Chaplin, CEO of IR35shield.co.uk, said he had spoken to the department which confirmed the matter was a mixture of general status issues concerning sole traders and other IR35 complexities.

UKRI is said to be contesting the fine with HMRC and the disputes are also being pursued by the workers in question.

“The sole trader tax issues can go back six years and if workers are told their status was wrong, they may have viable claims for holiday pay going back many years too,” Chaplin said. 

“If UKRI wants to move to payroll-only, which it could do, then ity could just make a policy change going forwards,” he added. “The extra tax UKRI will have to pay to hire the workers will just circulate back to the Treasury anyway. The current mess seems entirely unnecessary.”

‘Astonishing’ numbers

Figures show the tax bills issued to public sector departments for non-compliance with payroll legislation have hit around £300m.

The number is “astonishing”’ said Seb Maley, CEO of IR35 specialist Qdos. 

“These bodies should be leading by example, showing private sector businesses how to successfully manage the off-payroll working rules,” he said. “I’m not sure what’s more worrying – the sheer size of this bill or the fact that it’s something we’ve come to expect in the public sector. And I can’t help but wonder who’s next.”

Maley noted the irony of the government chasing itself and how a body specialising in innovative thinking had struggled with the off-payroll working system.

“It’s wooden dollars in the public sector, but if a private sector business was hit with a £36m bill, it could be curtains,” he said. “With this in mind, private sector firms must prioritise their compliance.”

Experts from Kingsbridge Group, which provides insurance and IR35 solutions, said the public sector “should be at the forefront of the changes”, but has “become a laughing stock in their execution” of the reforms. 

Stuck on repeat

While the accounts reveal little data regarding the investigation, an accountability exercise took place in 2021-22 which covered the assessment of IR35, according to Rebecca Seeley Harris, off-payroll expert at Re:Legal consulting. 

“Why it keeps happening is the interesting part,” she told AccountingWEB. “HMRC have obviously targeted their own as it is probably quite an easy win. The Public Accounts Committee (PAC) has been highly critical of HMRC, stating that the seemingly high levels of non-compliance in central government reflected poor implementation by HMRC.” 

In its 2022 IR35 report, the PAC recommended that HMRC develop “robust estimates” of non-compliance for the entire public sector and use the insights to reduce the compliance challenge.  

One suggestion was for HMRC to improve its guidance and tools, including the much-maligned Check Employment Status for Tax (CEST) system.  

“Although the government agreed with the PAC recommendations it disagreed with their conclusions,” Seeley Harris said. “HMRC said that they had undertaken an extensive programme of customer education and support during the implementation and apparently they also provide additional support. So, how come these departments keep failing?”

Problems often emerge as the rules are often too complex for anyone other than highly specialised experts to interpret, she added.

“Another problem is that the issue of employment status and IR35 falls between different departments. No one wants to take ownership of it,” she said. “Unless there is someone internal who is constantly monitoring compliance, mistakes will be made.”

Replies (18)

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By listerramjet
01st Jun 2023 10:35

it is not quite wooden dollars. There is the cost of dealing with the issue which likely is going to private sector advisors and legal types, and the potential for not recovering from the contractors concerned. But what it demonstrates is the absurd complexity of our tax rules. One of many many examples unfortunately.

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By Nebs
01st Jun 2023 10:45

Showing my ignorance here, but I had to look up "bilked". Seems to mean to get money from someone unfairly or dishonestly, but if HMRC were right then it is hardly unfairly or dishonestly? I'm none the wiser, time to move on.

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Replying to Nebs:
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By Arcadia
02nd Jun 2023 10:00

I knew what 'bilked' was, but I had to look up 'wooden dollars'.

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By tedbuck
01st Jun 2023 11:01

Absolutely nothing more than one would have expected from Government departments and the Civil Service respectively.
No ability to forward think and calculate the cost.
No joined up thinking.
No real interest in what they are doing or how they are doing it. Why are they using consultants in the first place - so that they can sit on their duffs and do nothing?
That is why we have things like PFI costing the taxpayer millions and HS2 doing likewise and the Boris enquiry which will have no real result except to waste more of our money.
Numpties just doesn't adequately describe these people they are leeches feeding on the taxes paid by the working man who, by and large, can no longer afford it.
Still the politicians and Civil Servants are ok and paid with plenty of perks so it's a case of 'I'm all right, Jack!'

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By More unearned luck
01st Jun 2023 11:23

'“The sole trader tax issues can go back six years and if workers are told their status was wrong, they may have viable claims for holiday pay going back many years too,” Chaplin said.'

True, but sole traders can also have viable claims for holiday pay going back many years even if their tax status isn't wrong if they are limb b workers.

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By Stoker
01st Jun 2023 11:26

This is yet another illustration that IR35 is an utter nonsense, despite the many so-called "reforms" to it and to employment legislation. This can be illustrated by considering how holiday pay should be calculated for freelancers and noticing that the law around this is contradictory, when "inside IR35".

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Replying to Stoker:
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By johnjenkins
01st Jun 2023 12:00

How many times do I and many like minded people have to say that HMRC shouldn't, in any way shape or form, get involved in employment status.
It won't be long before HMRC crashes completely.

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Replying to johnjenkins:
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By moneymanager
01st Jun 2023 13:43

"HMRC shouldn't, in any way shape or form, get involved in employment status"

Government should [***] out of all social matters, apologies in advance for any offence taken and absence of a trigger warning.

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Replying to Stoker:
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By ColA
02nd Jun 2023 10:02

Gordon Brown seemed to think it was a good idea, launched when I first entered the self-employment arena around Y2K.
Strangely I never did consult HMRC as to whether my engagements were employment as their standard response would have been the catch-all.
This turn of events makes an utter mockery of the whole scenario and not untypical of the rudderless administrations we’ve had at Westminster now for over 13 years.
Promises of improvement, stringency, greater tax yield & yet utter chaos has ensued.

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Replying to ColA:
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By johnjenkins
02nd Jun 2023 10:41

Chris Patten made a poignant remark on question time last night. He said that it was time the Tories and Labour put their differences away and start to work together to get the country back on its feet. I would certainly vote for a coalition of all parties at the next election. This country (HMRC is a classic example) is completely broken and can only be mended by a coming together of minds.

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Replying to johnjenkins:
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By Tom+Cross
02nd Jun 2023 16:11

I also thought that Chris (Lord) Patten spoke a great deal of sense last night. That's the reason his advice will be ignored. - There isn't any (common) sense in Westminster.

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Replying to Tom+Cross:
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By Yossarian
03rd Jun 2023 08:52

Unfortunately it seems to be a long tradition in Westminster that members only begin speaking sense once they've left.

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By moneymanager
01st Jun 2023 13:40

Chasing our tails while a one world government is being implemented by stealth., wooden dollars, the costs of change are added to national debt, i.e. deducted from private wealth, all going according to plan.

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By avalon111
01st Jun 2023 15:58

Even with the zebra graphic and incorporating the word ‘joke’ in the article title, it’s still a struggle to emphasise just what a farce this is for HMRC, The Treasury, and HMG in general.

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By ColA
02nd Jun 2023 09:56

At 75 my sight could just be failing, so:
bilked - as in not succeeding
billed - as levied as a fine?

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7om
By Tom 7000
02nd Jun 2023 10:48

I am waiting for the HMRC determination for IR35 on ...all the contractors in HMRC.... that will make interesting reading.....
hohohoho

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Replying to Tom 7000:
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By moneymanager
03rd Jun 2023 15:01

The very epitome of tail chasing, perhaps it could be encouraged to adopt the tendency of a backhole to consume itself before it consumes everything else?

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Replying to moneymanager:
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By Hugo Fair
03rd Jun 2023 15:38

Love the (presumably accidental) typo ...

A backhole that consumes itself is doing the direct opposite of what the colon is expecting it to do ... which is a decent analogy for HMRC and their IR35 involvement (and is likely to lead to the same amount of unpleasant mess)!

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