[UK] Defra pays ‘staggering’ £86.5million to HMRC for IR35 errors

In the UK, Defra has had to pay an additional £23 million to HMRC for mistakes made with IR35. Its total liability for off-payroll errors is now a staggering £86.5 million, ContractorUK reports.

The Department for Environment, Food and Rural Affairs warned in November 2021 that work to determine its “final liability” for IR35 status test mistakes was still “continuing.”

At that time, Defra had already reportedly paid £19 million to HMRC, thereby accepting Defra officials had erred in CEST-testing limited company contractors under the 2017 off-payroll rules.

At the time Defra estimated that its remaining IR35 liability to the taxman would likely come in at £48 million. A total that excluded any interest HMRC would charge.

However, in common with the MoJ - where putting too many PSCs outside IR35 when HMRC believed they were inside IR35 reportedly inflated its liability, six-fold - Defra has quietly admitted its total HMRC settlement for off-payroll errors has now rocketed. Going from a recalculated £63.2m (as of October 2022) to a final settlement of £86.5 million.

On November 28, a Defra spokesperson confirmed the £86.5 million liability for IR35 non-compliance by the department to ContractorUK.

Defra’s grand total for bodging IR35 - Including an extra £4m in HMRC interest - should have made the spokesperson feel “humiliated” or at best “uncomfortable,” a status expert told ContractorUK.

“But it’s even more mortifying for HMRC and HMT, assuming they realise what this staggering bill for Defra misapplying IR35 reforms means,” expert Kate Cottrell said.

Ms Cottrell is Bauer & Cottrell’s co-founder. She explained to ContractorUK, “It means the guidance they provided to the public sector at the time was clearly not worth the paper it was printed on.

“It also means assistance given by HMRC to taxpayer-funded bodies like Defra was wholly inadequate. And it means CEST is a complete failure. It wasn’t, and isn’t fit for purpose.”

While a tax lawyer believes that work done by HMRC and HMT to prepare the public sector for the 2017 rules clearly left engagers with the impression that IR35 was a “box-ticking exercise.”

“And that box-ticking exercise includes the use of CEST,” Rebecca Seeley Harris - a lawyer who has written a book on CEST, CEST Explained - told ContractorUK.

The Founder of ReLegal Consulting added, “There’s no point in pretending that substitution is a viable option, for example, because it will get you an ‘outside’ determination…when the reality or the contract does not back that up. 

“This, I believe, is what happened at Defra. The hiring manager said that there could be substitution, when in fact there were no provisions for it in the contract.”

But the ‘divisive CEST substitution question’ as Ms Seeley Harris has previously described it, isn’t solely the public sector’s problem.

“It seems this [question is to blame] in the Defra case….[but it pops up in] other cases that I have dealt with in the private sector,” she told ContractorUK.

“While CEST undoubtedly needs some work on it, the result of Defra’s ‘re-assessment’ could have happened even if the hiring manager had used a private [sector-built] tool.” 

Reassessments at Defra were disclosed in November 2021, when an outside IR35 determination for 85 per cent of PSCs shrank, following HMRC intervening and Defra reassessing, to 22 per cent of PSCs.

That one-fifth or so was then reportedly spliced even further, with ‘outside IR35’ eventually allocated to just six per cent of the contractor workforce at Defra.

Former tax officer Carolyn Walsh is conscious of the apparent disconnect between what HMRC quotes about IR35 non-compliance and the reality of what appears to have happened ‘on the ground’ in the public sector, at an actual site.

“After receiving advice and guidance from HMRC in a 2019 investigation, [Defra’s] approach to its status handling was amended and since then almost 30 per cent of contractors were ‘inside IR35.’ 

“This means HMRC pointed out -- and had their recommendation accepted -- that about 25 per cent of contractors who should have been operating IR35 were not.

“Well, this is far short of the 90 per cent of contractors who HMRC has claimed for years and years were breaching the IR35 rules,” ex-tax officer, Ms Walsh said.

She reportedly told ContractorUK, “That should not be overlooked because that ‘90 per cent flouting the law’ claim was a bit of a catalyst for the IR35 legislation being reformed.”

The Revenue’s claim that nine out of 10 PSCs breach the Intermediaries legislation isn’t sector-specific and is reportedly far from universally accepted.

However, there is one big difference between public and private, and it is a difference that the taxman isn’t going to like, according to Ms Cottrell.

“The most shocking aspect…is that the public sector blindly accepts HMRC’s opinion -- and it is just that – an opinion. The opinion is Defra have got [IR35 status] wrong, and they are unable to go to the tax tribunal or courts.

“But there will not be such an easy ride for HMRC in the private sector,” she said. “Many in the private sector have sought specialist IR35 advice and gathered all the evidence needed to defend any challenge by HMRC.” 

Ms Cottrell is a former inspector for the Revenue. She told ContractorUK, “It is of course only the public sector that can just accept owing millions of pounds. The majority of private sector businesses would have to fight - and they will fight, as the potential sums involved would put them out of business and many thousands of their employees out of work.”

Source: ContractorUK

(Links and quotes via original reporting)

In the UK, Defra has had to pay an additional £23 million to HMRC for mistakes made with IR35. Its total liability for off-payroll errors is now a staggering £86.5 million, ContractorUK reports.

The Department for Environment, Food and Rural Affairs warned in November 2021 that work to determine its “final liability” for IR35 status test mistakes was still “continuing.”

At that time, Defra had already reportedly paid £19 million to HMRC, thereby accepting Defra officials had erred in CEST-testing limited company contractors under the 2017 off-payroll rules.

At the time Defra estimated that its remaining IR35 liability to the taxman would likely come in at £48 million. A total that excluded any interest HMRC would charge.

However, in common with the MoJ - where putting too many PSCs outside IR35 when HMRC believed they were inside IR35 reportedly inflated its liability, six-fold - Defra has quietly admitted its total HMRC settlement for off-payroll errors has now rocketed. Going from a recalculated £63.2m (as of October 2022) to a final settlement of £86.5 million.

On November 28, a Defra spokesperson confirmed the £86.5 million liability for IR35 non-compliance by the department to ContractorUK.

Defra’s grand total for bodging IR35 - Including an extra £4m in HMRC interest - should have made the spokesperson feel “humiliated” or at best “uncomfortable,” a status expert told ContractorUK.

“But it’s even more mortifying for HMRC and HMT, assuming they realise what this staggering bill for Defra misapplying IR35 reforms means,” expert Kate Cottrell said.

Ms Cottrell is Bauer & Cottrell’s co-founder. She explained to ContractorUK, “It means the guidance they provided to the public sector at the time was clearly not worth the paper it was printed on.

“It also means assistance given by HMRC to taxpayer-funded bodies like Defra was wholly inadequate. And it means CEST is a complete failure. It wasn’t, and isn’t fit for purpose.”

While a tax lawyer believes that work done by HMRC and HMT to prepare the public sector for the 2017 rules clearly left engagers with the impression that IR35 was a “box-ticking exercise.”

“And that box-ticking exercise includes the use of CEST,” Rebecca Seeley Harris - a lawyer who has written a book on CEST, CEST Explained - told ContractorUK.

The Founder of ReLegal Consulting added, “There’s no point in pretending that substitution is a viable option, for example, because it will get you an ‘outside’ determination…when the reality or the contract does not back that up. 

“This, I believe, is what happened at Defra. The hiring manager said that there could be substitution, when in fact there were no provisions for it in the contract.”

But the ‘divisive CEST substitution question’ as Ms Seeley Harris has previously described it, isn’t solely the public sector’s problem.

“It seems this [question is to blame] in the Defra case….[but it pops up in] other cases that I have dealt with in the private sector,” she told ContractorUK.

“While CEST undoubtedly needs some work on it, the result of Defra’s ‘re-assessment’ could have happened even if the hiring manager had used a private [sector-built] tool.” 

Reassessments at Defra were disclosed in November 2021, when an outside IR35 determination for 85 per cent of PSCs shrank, following HMRC intervening and Defra reassessing, to 22 per cent of PSCs.

That one-fifth or so was then reportedly spliced even further, with ‘outside IR35’ eventually allocated to just six per cent of the contractor workforce at Defra.

Former tax officer Carolyn Walsh is conscious of the apparent disconnect between what HMRC quotes about IR35 non-compliance and the reality of what appears to have happened ‘on the ground’ in the public sector, at an actual site.

“After receiving advice and guidance from HMRC in a 2019 investigation, [Defra’s] approach to its status handling was amended and since then almost 30 per cent of contractors were ‘inside IR35.’ 

“This means HMRC pointed out -- and had their recommendation accepted -- that about 25 per cent of contractors who should have been operating IR35 were not.

“Well, this is far short of the 90 per cent of contractors who HMRC has claimed for years and years were breaching the IR35 rules,” ex-tax officer, Ms Walsh said.

She reportedly told ContractorUK, “That should not be overlooked because that ‘90 per cent flouting the law’ claim was a bit of a catalyst for the IR35 legislation being reformed.”

The Revenue’s claim that nine out of 10 PSCs breach the Intermediaries legislation isn’t sector-specific and is reportedly far from universally accepted.

However, there is one big difference between public and private, and it is a difference that the taxman isn’t going to like, according to Ms Cottrell.

“The most shocking aspect…is that the public sector blindly accepts HMRC’s opinion -- and it is just that – an opinion. The opinion is Defra have got [IR35 status] wrong, and they are unable to go to the tax tribunal or courts.

“But there will not be such an easy ride for HMRC in the private sector,” she said. “Many in the private sector have sought specialist IR35 advice and gathered all the evidence needed to defend any challenge by HMRC.” 

Ms Cottrell is a former inspector for the Revenue. She told ContractorUK, “It is of course only the public sector that can just accept owing millions of pounds. The majority of private sector businesses would have to fight - and they will fight, as the potential sums involved would put them out of business and many thousands of their employees out of work.”

Source: ContractorUK

(Links and quotes via original reporting)