‘Embarrassment’ for government departments after IR35 errorsby
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.
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.
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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