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‘Embarrassment’ for government departments after IR35 errors

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The government doesn’t appear to understand how IR35 rules apply to its own contractors, experts have said, after admissions from the Home Office and Department of Work and Pensions that they owe millions in back taxes for inaccurate application of the rules.

4th Aug 2021
Journalist
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Two government departments have fallen foul of HMRC’s “Orwellian” contractor taxation rules concerning off-payroll worker status, leaving them with bills topping £100m.

The Department of Work and Pensions (DWP) first made the admission in its 2020-21 annual report that it had used HMRC’s Check Employment Status Tool (CEST) to assess engaged off-payroll workers’ employment status or “correct tax treatment”.

It owes the tax inspectorate £88m for “historic errors” in assessing tax liability for its off-payroll workers over the period 2017-21.

Squirrelled away under “Fruitless payments” in the report, the note said: “In March 2020 DWP received a Letter of Offer from HMRC that formally concluded their review of IR35 implementation in DWP. The result was agreement on historic errors and acceptance by DWP of a liability for tax/NI [National Insurance] plus interest for the financial years 2017-18 (£21.1m), 2018-19 (£36.7m) and 2019-20 (£29.7m). A liability for 2020-21 (£0.4m) was also subsequently agreed.”

Days later, the Home Office quietly published its own annual report with a similar admission it had botched assessments of its contractors’ employment and tax status between 2017 and 2021.

It admitted being “careless” in its application of the off-payroll rules, and was penalised £4m along with a £29.5m bill for incorrect assessments plus interest on the accrued amounts.

Despite its apparent recklessness with application of the rules, the Home Office may escape without paying a penny if it meets a number of obligations inside three months.

Conditions include a 100% assurance check on ‘out of scope’ determinations; better training of hiring managers; improved governance around the use of contract labour inside the Home Office, and stronger monitoring of compliance with IR35 throughout future contracts from start to finish.

“The Home Office expects to meet those conditions,” the report said.

‘Laughable absurdity’

IR35 reforms were introduced in 2017 for public sector workers, as all public bodies became responsible for determining the tax status of contractors they hired.

The DWP, Home Office, or any other government department or public sector organisation, had responsibility for categorising the contractors they work with and taxing them either as permanent staff or as off-payroll employees, where they are outside of the scope of IR35.

On April 6, 2021, similar changes were introduced for the private sector, and since then medium to large businesses have been required to access the tax status of contractors they hire.

However, a widespread distrust of the reliability of the CEST tool triggered heavy lobbying to delay or even reverse the rules, which were brought in during the middle of the coronavirus pandemic when firms and workers were struggling.

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Replies (24)

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By Hugo Fair
04th Aug 2021 18:24

Forget the absurdity (of IR35 and one govt dept fining another one) ... and focus on:

"(The Home Office) was penalised £4m along with a £29.5m bill for incorrect assessments plus interest on the accrued amounts ... (but it) may escape without paying a penny if it meets a number of obligations inside three months:
Conditions include a 100% assurance check on out of scope determinations; better training of hiring managers; improved governance around the use of contract labour inside the Home Office, and stronger monitoring of compliance with IR35 throughout future contracts from start to finish."

Is this escape route open to the rest of us?

Thanks (17)
Replying to Hugo Fair:
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By Paul Crowley
05th Aug 2021 19:17

How else can it be interpreted?

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Replying to Hugo Fair:
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By More unearned luck
05th Aug 2021 21:43

Er, yes. Penalties for careless errors can be suspended for a period of up to two years. The HO got off lightly with just a three month period for keeping its nose clean.

The taxpayer has to agree to do things intended to minimise future errors, if further errors are possible (eg someone who has ceased to be in SA can't minimise errors on returns if returns are no longer being made).

BTW Robert Salter of Blicks is wrong to say that the DWP was fined. Their £87.9m was just tax, NIC an interest. It seems that using CEST amounts to taking reasonable care. In fact the DWP owed £94.8m if you add in the errors of a subsidiary.

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Replying to More unearned luck:
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By Hugo Fair
05th Aug 2021 23:40

Possibly foolishly, but I took the article at face value where it says "(The Home Office) was penalised £4m along with a £29.5m bill for incorrect assessments plus interest on the accrued amounts ... (but it) may escape without paying a penny if it meets a number of obligations inside three months."
"Escaping without paying a penny" doesn't sound like 'only' the penalty portion was suspended.
Do you have a reference that says otherwise? And can you please provide the source for the "suspension due to careless errors" option to which you refer?

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Replying to Hugo Fair:
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By More unearned luck
06th Aug 2021 15:00

Para 14, sch 24, FA 2007. HMRC have the power to postpone part of a penalty, but I understand that in practice it is all or nothing.

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By Beef curtains
05th Aug 2021 09:23

Q1/ Explain the meaning of the words "playing at shops"

Q2/ Write a short dissertation on Margaret Thatcher's view that she found "Yes Minister" not funny, rather that it was frighteningly realistic

Q3/ Make a meaning phrase or saying using the following words: "Up; head; ar*e".

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By milleniumaire
05th Aug 2021 10:41

I have been contracting for 23 years and IR35 has been the bane of my life, and still is, although much has changed.

I no longer offer my company's services to public sector departments since the introduction of off-payroll rules.

HMRC have decided the contracting company should no longer make the decision, even in the private sector and it is now the responsibility of the hiring company (my clients) to decide. These people have no knowledge of the intricacies of IR35 and not surprisingly many companies, including the banks, have decided to not take any risk and avoid hiring contractors.

HMRC knew exactly what they were doing when they moved IR35 status responsibility to the organisations that do the hiring and the result has been as expected; a reduction in contracts and many contractors retiring, going permanent or moving abroad. Offshoring makes the situation worse and there are plenty of large consultancy firms to fill the gap with their extortionate rates.

I suspect this news about HMRC penalising other government departments is simply a warning shot to all private companies about what could happen if you engage contractors.

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Replying to milleniumaire:
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By AndyC555
05th Aug 2021 11:42

"HMRC knew exactly what they were doing when they moved IR35 status responsibility to the organisations that do the hiring"

I doubt they did. What they THOUGHT would happen would be they'd get lots of extra tax and NIC. What actually happened was what you describe. People changing behaviour.

HMRC/Government is a bit like a hunter shooting a deer and expecting they will be able to come back the next day and shoot another because the herd will still be in the same place.

Thanks (4)
Replying to milleniumaire:
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By cereus77
05th Aug 2021 12:28

I also am a long suffering contractor and agree with you except perhaps on your last two points, where perhaps a little more nuance is needed.

I don’t think HMRC or the government have properly consulted on this or considered the bigger picture - particularly in the light of Brexit. They seem solely motivated to raise more tax, and time after time, fail to take account of the bigger picture and the unintended consequences which usually follow these changes.

You mention increased offshoring and contractors choosing to work abroad rather than in the UK. Certainly these will already be underway and as soon as the Covid situation has improved, many contractors will be paying tax in other countries in Europe rather than the UK. Likewise with offshoring where tax is paid in India or the Philippines on services provided to companies based in the UK. Both these things are likely to result in a large hole in the expected revenues the brains at HMRC calculated would accrue from their cynical and poorly considered changes to IR35.

And rather than a warning shot, the substance of this article appears to be a serious case of friendly fire. The DWP and HMRC look utterly incompetent and with their lax and easy get out on the tax and penalties it seems a precedent has been set which many will seek to use.

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By johnjenkins
05th Aug 2021 10:45

Let's not bother with CEST. Let's get rid of HMRC involvement in employment status. Problem solved.
It's time our bodies stood up stated that employment status has nothing to do with HMRC it's a commercial decision. So will HMRC fine itself for using subbies in making tax digital.

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Replying to johnjenkins:
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By Hugo Fair
05th Aug 2021 10:56

"So will HMRC fine itself for using subbies in making tax digital"?
Probably at the same time that it launches a tax avoidance enquiry into it's sale of 60+% of its estate to Mapeley STEPS (who are ultimately based offshore for some reason)?

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By john mallon
05th Aug 2021 10:56

So, do the fines and penalties issued to to the DWP, increase or decrease our taxes?

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Replying to john mallon:
By SteveHa
05th Aug 2021 11:15

Surely nuetral. Penalties paid by the public pot into the public pot.

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Replying to SteveHa:
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By john mallon
05th Aug 2021 14:54

Thanks Steve. What happens, I wonder, when HMRC charge you with not operating the rules properly and claim the tax off you that they should have received (plus penalties) had you operated them properly, do they give the tax back to the contractor in question that he declared and paid to HMRC or do HMRC knock that off what they charge you?

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Replying to john mallon:
By SteveHa
06th Aug 2021 08:44

The contractor will made a self-assessment amendment in the usual way.

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Replying to SteveHa:
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By More unearned luck
06th Aug 2021 15:08

Yes, but it means that the DWP has less money to spend on the things it should be spending money on. For example the time hanging on the telephone to speak to someone about your benefits might get longer.

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By tedbuck
05th Aug 2021 11:08

Wow! Government departments getting it wrong and big-time too.

Are we surprised? No I don't think so except that I'm surprised it isn't HMRC that c***ed it up.

I am waiting for the day when their errors get big enough for them to fine themselves - but then I don't think they would admit it do you?

I can remember talking to a tax training guy who was recounting how he had been asked by HMRC to go into their offices to explain how a recent bit of tax legislation worked. Says it all doesn't it?

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By tedbuck
05th Aug 2021 11:09

Wow! Government departments getting it wrong and big-time too.

Are we surprised? No I don't think so except that I'm surprised it isn't HMRC that c***ed it up.

I am waiting for the day when their errors get big enough for them to fine themselves - but then I don't think they would admit it do you?

I can remember talking to a tax training guy who was recounting how he had been asked by HMRC to go into their offices to explain how a recent bit of tax legislation worked. Says it all doesn't it?

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By GW
05th Aug 2021 11:10

While I agree with the comments about IR35 the situation with HMRC going after other government departments for tax isn't new.

A few years ago while researching at the National Archives I came across some documents that had been misfiled. The documents were from 1911 and concerned the Inland Revenue chasing the War Office for stamp duty on the sale of a drill hall - the War Office thought the building was covered by an exemption for barracks, the Inland Revenue disagreed and the War Office paid up.

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By dmmarler
05th Aug 2021 11:21

Not only will the taxpayer have to pay the fines levelled on the DWP, the taxpayer has already paid for the legislation to be drafted and argued over, presentations to taxpayers, HMRC's IT guys to create CEST, HMRC staff to analyse the various DWP and other departments' mistakes, etc. We now have the usual round of appeals, etc., which will keep legal departments in funds for years. Sub-contractors exist for business reasons. The only reason they became popular was the tax/NI structure/dividends. If NI were abolished, and income tax adjusted to cover the difference in the overall tax take, the taxpayer would be far better off as would the government.

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By SimonLever
05th Aug 2021 12:25

What a brilliant defence for future IR35 cases!
We used the CEST tool to determine status, as advised by HMRC, and came to our decision in an honest and impartial way.
The tool is clearly flawed as even the Government cannot use it correctly.
We did everything we could to comply with the legislation. Not our fault if the tools provided by the Government gave the wrong decision.
They should have made a better tool!

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By sally1964
05th Aug 2021 13:14

I have a client working for MOD - they were told that as the MOD could not recruit enough contractors is IR35 was applied they they were told to ignore IR35 and say they has a special exemption!

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Tornado
By Tornado
05th Aug 2021 13:37

So it is only 'Embarrassment' for the Government when they break the law, how quaint.

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By drakeltd
06th Aug 2021 08:53

Another angle on this is that the ‘tax collected’ from these soft target government departments, contributes huge amounts to the tax collected total under the auspices of IR35.
Thus going a long way towards justifying HMRCs target of tax to be collected under IR35 of, what was it, £1.2B over/in 3 years.
Hence justifying HMRCs spend, over the years, in compliance costs.

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