Third government department coughs to IR35 miscalculationby
A third government department owes millions to HMRC after incorrectly applying contractor tax liabilities despite using the tax inspectorate’s own calculator, causing accounting experts to ponder “who's next?” in the latest IR35 debacle.
The UK’s court system has become the latest government department to stumble over off-payroll tax rules, landing itself a £12.5m bill for incorrect IR35 decisions.
HM Courts & Tribunals Service (HMCTS) must pay back the millions to HMRC, on the heels of similar compensation from the Department of Work and Pensions (DWP) that owed £88m and the Home Office, which had a liability of £33.5m.
Listed under ‘fruitless payments’ in HMCTS’ annual report, (page 57), the courts service said in 2019, HMRC challenged the Ministry of Justice 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”. Ultimately, the arm of the justice ministry was wrong in its calculation.
Fingers have again been pointed at HMRC’s much-maligned Check Employment Status for Tax (CEST) online tool. CEST determines how the work being done should be dealt with for tax purposes, and was used by all three departments.
“The question ‘who next?’ springs to mind,” said Seb Maley, chief executive of Qdos, a contractor services firm. “This is the third government body to reveal that it has been stung by a multi-million-pound IR35 tax liability. But given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made.”
CEST was introduced in 2017, but since the IR35 tax reforms of April 6, 2021, many medium and larger companies have reported confusion over the tax status of certain contractors. With government departments tripping up in their use of CEST, the episode has “threatened compliance rather than ensuring it” according to industry voices.
“Businesses should avoid it altogether or at the very least get a second opinion on every answer it provides,” said Maley. “As a government body, the £12.5m in tax liability paid is effectively wooden dollars – money passing from one department to another. But it would be a different story for a private sector firm, and the sheer size of a tax bill like this could devastate a business.”
Rather than pin the blame on the calculating tool, officials should look at the “incomprehensible” amalgam of tax laws, said IR35 expert Rebecca Seeley Harris, former policy advisor to the Office of Tax Simplification.
“The problem, for both the public and the private sector, is not just the use of CEST but, the incomprehensible quagmire that is employment status,” said Seeley Harris, of Re Legal Consulting. “CEST is based on generalisations and any nuances are very much in HMRC’s favour but, to answer it ‘accurately’, is almost impossible.”
This is not because of any deceit on the part of the client, but simply because the rules based on case law have too many different interpretations, she said.
“HMRC’s interpretation of mutuality of obligations, is a perfect example,” she said. “It is wildly different from the general perception and understanding of what mutuality is supposed to mean.” HMRC’s view and that of the client are naturally bound to differ, she said.
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