A third government department has paid the heavy price for incorrectly determining the IR35 status of contractors, with HM Courts & Tribunal Services revealing in its 2020/21 accounts that it was made to pay £12.5m to HMRC.
This development follows recent news of the staggering £87.9m tax bill handed to the Department for Work and Pensions (DWP) and the £33.5m received by the Home Office. It means that various government bodies have now been hit with IR35-related tax liabilities amounting to over £133m.
HM Courts & Tribunal Services published the information in its Annual Report and Accounts for 2020/21, stating that in 2019 HMRC challenged the Ministry of Justice (MoJ) - of which HM Courts & Tribunal Service is an executive agency - to revisit IR35 assessments made on an unspecified number of contractors engaged between 6th April 2017 to 5th April 2020.
Subsequently, it was found that IR35 determinations based on answers provided by HMRC’s very own IR35 tool, CEST, were incorrect. As a result, the government body was issued with a multi-million pound liability resulting from missed tax and National Insurance payments.
In response, a spokesperson for the MoJ told The Register that “strict checks and extra controls have been introduced to ensure that tax rules are applied correctly."
We’ll now explore the wider implications of yet another government body receiving an eye-watering IR35 bill.
CEST’s flaws have been well documented in its four years of operation, and HM Courts & Tribunal Services’ £12.5m tax payment makes this tool’s failings impossible to ignore. Given the DWP also relied on CEST to determine the IR35 status of contractors, it’s not the first time its shortcomings have proven costly - nor is it likely to be the last.
As Qdos CEO, Seb Maley, explained to The FT Adviser: “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."
From the limited information available, the right of substitution was said to be important - if not decisive - in this situation.
In 2019, the MoJ was told to revisit contractors who they had engaged outside IR35 on the basis that “the individual worker could be substituted by another worker at the choice of the worker without consultation with the Department and without the Department having any right of veto.”
In other words, contractually speaking these contractors may have had an unfettered right of substitution - a clause relating to Personal Service and one that helps paint a picture of an outside IR35 engagement. Therefore, given CEST relies heavily on substitution, these contractors were deemed outside IR35.
However, following scrutiny from HMRC, despite holding the right of substitution the IR35 decisions made by the MoJ did not stand up when it mattered.
This serves as a firm reminder that IR35 status should only be set after having reviewed all aspects of an engagement - one clause alone, such as substitution, does not necessarily mean a contractor belongs outside IR35.
The introduction of IR35 reform in both the public and private sectors was an indication of how important HMRC sees IR35 in terms of raising revenue. The series of IR35 bills handed out to government departments is another example and potentially, even a sign of things to come.
This latest turn of events is proof that IR35 compliance sits high on the agenda for HMRC, that can still investigate contractors retrospectively, focusing on contracts that took place when the individual held the liability (before IR35 reform).
With this in mind, it’s important that contractors continue to protect themselves from the risk that IR35 still poses. The cost of non-compliance can be financially devastating, both for contractors and the businesses that engage them.
Qdos are a leading provider of award-winning services, including IR35 insurance. For more information, please call 0116 262 0999 or email [email protected].
Ask away! One of our team will get back to you!