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istock_Ministry-of-justice_William Barton

Third government department coughs to IR35 miscalculation

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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.

25th Aug 2021
Journalist
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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.”

‘Incomprehensible quagmire’

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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Replies (15)

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By Justin Bryant
26th Aug 2021 09:42

This is all eminently unsurprising. One incompetent civil service department creates a worse than useless online tool to determine IR35 status. Another incompetent civil service department uses said tool. Not just a case of rubbish in, rubbish out, but instead rubbish in, said rubbish made even more rubbish, rubbish squared out.

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By jonnybennett
26th Aug 2021 10:05

One government department investigates another department. Result is that one government department has to pay money to another government department. It’s a zero sum game paid for by the taxpayer.

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Replying to jonnybennett:
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By Justin Bryant
26th Aug 2021 10:15

Yes; there are no incentives to be efficient in the civil service. Quite the opposite. The quote here sums things up nicely: https://www.goodreads.com/quotes/40705-but-the-plans-were-on-display-on-...

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By Stoker
26th Aug 2021 10:10

IR35 is and has always been, entirely unfit for any purpose. The government and businesses have wasted much time and much more money on this foolish legislation, brought in by Red Dawn Primarolo under the aegis of Blair, the grinning monster of Iraq.

Ir35 should be scrapped forthwith.

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By [email protected]
26th Aug 2021 10:42

It seems to me that the issue is not CREST but the whole basis of the legislation. If tax manipulation was the clear reason for the need for IR 35 then the solution would be clear too.
A "muddy" solution indicates yto me a muddy ideal.
How can the government want to encourage more entrepreneurs and small business and then club them to death at birth?

Come on guys sort it out urgently

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By dmmarler
26th Aug 2021 10:44

This IR35 nonsense should be scrapped. NI should be abolished and incorporated into general taxation (I am sure someone with a little nous would be able to demonstrate that the taxpayer would not be disadvantaged so it would not lose votes.) Once that is done there would be no question anyone was trying to avoid NI - which is what this is all about. UK plc would save the cost of civil servants fining each others' departments, and attempting to determine a completely valid business transaction is a tax wheeze, together with the associated legal costs. Can we all have some common sense please?

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Replying to dmmarler:
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By tedbuck
27th Aug 2021 10:59

Common sense is not permitted in HMRC or HMG departments - surely you realise that. There isn't a box to tick!

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By john hextall
26th Aug 2021 10:48

Under another hat, I've just had an email from the Health & Safety Executive who are opening an investigation to restrict the use of lead in ammunition...

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By alialdabawi
26th Aug 2021 10:53

It is shambolic that CEST is provided by the government as a tool to determine status, and then ends up being wrong!

Either let CEST results - when correctly answered - stand, simplify the foundational rules upon which it was built, or discontinue CEST. The current state of affairs makes the phrase 'unfit for purpose' sound like a compliment!

All Hail the magnificent and ever-effacious OTS.

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By steve tees
26th Aug 2021 11:14

Sorry to be thick but what do you mean 'coughs'?

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By Paul Crowley
26th Aug 2021 11:14

The real issue is that the state does not understand the rules that the state puts in place
Does any MP understand any of this?
It is up to MPs to hold the State accountable for inept rules

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By tedbuck
26th Aug 2021 11:49

The really telling thing is that HMRC were told but ignored it. Sounds familiar that does. They don't listen, barely pretend to and when it goes wrong they just look even more stupid. Anyone think of something similar today?

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By Nebs
26th Aug 2021 12:47

If all the people, in the department paying the tax, took a 10% pay cut until such time as the tax bill was settled, perhaps they would take more care in the future.

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By trecar
26th Aug 2021 12:57

Seems that IR35 is also being identified as a partial cause of the current crisis over the shortage of lorry drivers. I have no idea what its effects are in the IT industry but I would suspect that it is not positive. There must be other areas of business where its impact is damaging to prospects and potential. What is needed is for the business department to carry out a study of the impact on our economy and then spell out to HMRC that their remit is to assess and collect tax and not do all they can to damage the tax generation ability of the workforce. My experience of the IT industry is that currently wages offered are substantially less than that obtained by the contractor market and retention is starting to become a factor as skilled labour shortages arise.
It needs the politicians to understand that post Covid and Brexit we are developing a different type of economy and if we are to succeed we need to remove the barriers that prevent it operating efficiently. One of those barriers is IR35 and HMRC's dire efforts to impose and implement it. If government departments are using contractors and getting classifications wrong then I don't see why business should be considered to be able to do any better. IR35 is a classic example of the need to redesign the tax system around a modern economy, not tinker at the edges.

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By Anthony G Thorne
27th Aug 2021 10:19

If the DoJ cannot get it right what chance do the rest of us have?

Is it now the time for Government to rewrite the legislation to fit a 21st economy?

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