[UK] £48million tax bill for Defra’s IR35 status ‘inaccuracies’

Defra has become the fifth UK ministerial department to admit getting the government’s own IR35 rules wrong, errors that have led to an HMRC liability of £48million, Contractor UK

The admission follows four other departments making similar IR35 mistakes, having also used CEST. The MoJ is one of the four, it has seen its liability for off-payroll errors rocket from £12.5m to £72m.

In total, the HMRC pay-outs from the five departments (which as ‘end-users’ under the April 2017 IR35 rules pay tax, NICs, penalties and interest) is a staggering £244million.

It reportedly includes the DoH’s £4.3m bill for 2018/19; £87m and £33m in the accounts of the DWP and Home Office respectively, and the new £120m total in the MoJ and Defra 20/21 accounts.

When the bills of the health department, Home Office and DWP for IR35 errors first emerged, status advisory Qdos asked, ‘Which department next?’

On the four-month anniversary of the private sector rules (which are based on the 2017 rules), IR35 firm Bauer & Cottrell said the bills likely represented “just the tip of the iceberg.”

Defra and MoJ now racking up £120million between them for incorrectly assessing PSCs as outside IR35 when they were inside IR35, seems to vindicate the concerns of both advisories.

However, for contractors and private sector organisations engaging PSCs, it is a disturbing beginning to 2022, particularly with HMRC’s ‘light-touch’ expiring in April.

Asked earlier this week about the £244m bill, the UK’s contractor trade group, the Association of Independent Professionals and the Self-Employed responded with a warning.

“Hiring organisations that have tried their best to comply should [now] expect to be involved in protracted tussles with HMRC over whether or not they have applied these complex rules correctly,” Andy Chamberlain from the Association told ContractorUK.

He did offer the caveat that it was just “the view of HMRC” that the five departments failed on off-payroll compliance, whether commercial engagers will be prepared to fight is still in question.

IPSE’s policy director, Mr Chamberlain asked, “Is this really what we want UK businesses to be focussed on? As they attempt to trade out of a crippling recession?”

But it’s not just challenging HMRC that will impact end-users, there is also a payment ‘back and forth’ to the Revenue, plus contractor redeployment and reassessment.

Defra in its accounts, for example, reportedly said that while it initially paid HMRC some £19million in March 2021, because it “accepted” its IR35 “inaccuracies”, the liability later rose to £48m.

“The work done on reassessments has decreased the proportion of contractors outside IR35 from 85 per cent to 22 per cent of all current contractors,” the department said.

“[But] since the 31 March 2021, work on reassessing contractor’s [sic] IR35 statuses has continued. This has led to additional contractors being reassessed as inside IR35.

“In addition to this, some of the assumptions made in the initial calculation have recently been clarified with HMRC, which will also affect the liability. The remaining liability now stands at £48 million, based on six per cent of contractors remaining outside IR35.”

Of further concern for any private sector outfit hoping to calculate potential liabilities for mistakes with IR35 (whether they use HMRC’s own tool as the five departments did or not), Defra said, “Work is continuing to agree the final liability with HMRC.”

MoJ fined for ‘careless application of IR35 rules’

The MoJ is of a similar size - it works with 34 agencies and bodies versus Defra’s 33 agencies and bodies - but it has paid out almost twice as much for IR35 blunders.

The department previously declared a £12.5m liability to HMRC because the ultimate arbiter of status decisions, HM Courts and Tribunal Service, also got IR35 wrong.

But even more embarrassing, the Ministry of Justice has been slapped with an HMRC penalty of £15million owing to the IR35 errors, because its officials were “careless” in applying the 2017 rules.

In its accounts, the MoJ moved to clarify: “That penalty has been suspended for three months subject to certain conditions and is therefore not included within the losses total.

“The conditions relate to meeting the department’s notification and filing

obligations, a 100% assurance check on all out of scope determinations, and improved training of hiring managers. The department expects to meet those conditions.”

IPSE said, “The fact that two major government departments have run into trouble with their IR35 compliance shows just how complicated and confusing the regulations are.

“Even with guidance, support and training from HMRC, the MoJ and Defra have not made accurate status determinations – in the view of HMRC at least. Private-sector organisations that aren’t as connected to HMRC will almost certainly find it equally challenging.”

Source: Contractor UK

(LInks and quotes via original reporting)

Defra has become the fifth UK ministerial department to admit getting the government’s own IR35 rules wrong, errors that have led to an HMRC liability of £48million, Contractor UK

The admission follows four other departments making similar IR35 mistakes, having also used CEST. The MoJ is one of the four, it has seen its liability for off-payroll errors rocket from £12.5m to £72m.

In total, the HMRC pay-outs from the five departments (which as ‘end-users’ under the April 2017 IR35 rules pay tax, NICs, penalties and interest) is a staggering £244million.

It reportedly includes the DoH’s £4.3m bill for 2018/19; £87m and £33m in the accounts of the DWP and Home Office respectively, and the new £120m total in the MoJ and Defra 20/21 accounts.

When the bills of the health department, Home Office and DWP for IR35 errors first emerged, status advisory Qdos asked, ‘Which department next?’

On the four-month anniversary of the private sector rules (which are based on the 2017 rules), IR35 firm Bauer & Cottrell said the bills likely represented “just the tip of the iceberg.”

Defra and MoJ now racking up £120million between them for incorrectly assessing PSCs as outside IR35 when they were inside IR35, seems to vindicate the concerns of both advisories.

However, for contractors and private sector organisations engaging PSCs, it is a disturbing beginning to 2022, particularly with HMRC’s ‘light-touch’ expiring in April.

Asked earlier this week about the £244m bill, the UK’s contractor trade group, the Association of Independent Professionals and the Self-Employed responded with a warning.

“Hiring organisations that have tried their best to comply should [now] expect to be involved in protracted tussles with HMRC over whether or not they have applied these complex rules correctly,” Andy Chamberlain from the Association told ContractorUK.

He did offer the caveat that it was just “the view of HMRC” that the five departments failed on off-payroll compliance, whether commercial engagers will be prepared to fight is still in question.

IPSE’s policy director, Mr Chamberlain asked, “Is this really what we want UK businesses to be focussed on? As they attempt to trade out of a crippling recession?”

But it’s not just challenging HMRC that will impact end-users, there is also a payment ‘back and forth’ to the Revenue, plus contractor redeployment and reassessment.

Defra in its accounts, for example, reportedly said that while it initially paid HMRC some £19million in March 2021, because it “accepted” its IR35 “inaccuracies”, the liability later rose to £48m.

“The work done on reassessments has decreased the proportion of contractors outside IR35 from 85 per cent to 22 per cent of all current contractors,” the department said.

“[But] since the 31 March 2021, work on reassessing contractor’s [sic] IR35 statuses has continued. This has led to additional contractors being reassessed as inside IR35.

“In addition to this, some of the assumptions made in the initial calculation have recently been clarified with HMRC, which will also affect the liability. The remaining liability now stands at £48 million, based on six per cent of contractors remaining outside IR35.”

Of further concern for any private sector outfit hoping to calculate potential liabilities for mistakes with IR35 (whether they use HMRC’s own tool as the five departments did or not), Defra said, “Work is continuing to agree the final liability with HMRC.”

MoJ fined for ‘careless application of IR35 rules’

The MoJ is of a similar size - it works with 34 agencies and bodies versus Defra’s 33 agencies and bodies - but it has paid out almost twice as much for IR35 blunders.

The department previously declared a £12.5m liability to HMRC because the ultimate arbiter of status decisions, HM Courts and Tribunal Service, also got IR35 wrong.

But even more embarrassing, the Ministry of Justice has been slapped with an HMRC penalty of £15million owing to the IR35 errors, because its officials were “careless” in applying the 2017 rules.

In its accounts, the MoJ moved to clarify: “That penalty has been suspended for three months subject to certain conditions and is therefore not included within the losses total.

“The conditions relate to meeting the department’s notification and filing

obligations, a 100% assurance check on all out of scope determinations, and improved training of hiring managers. The department expects to meet those conditions.”

IPSE said, “The fact that two major government departments have run into trouble with their IR35 compliance shows just how complicated and confusing the regulations are.

“Even with guidance, support and training from HMRC, the MoJ and Defra have not made accurate status determinations – in the view of HMRC at least. Private-sector organisations that aren’t as connected to HMRC will almost certainly find it equally challenging.”

Source: Contractor UK

(LInks and quotes via original reporting)