HMRC has handed the Home Office a £33.5m IR35 bill after a review of its off-payroll compliance process was found to be “careless.”
The tax bill, which also includes a £4m penalty for incorrectly determining the IR35 status of contractors, was revealed in the department’s recently published 2020-2021 annual report and accounts.
According to the document, HMRC placed the Home Office under review in 2018 over its implementation of IR35 reform, which came into effect in the public sector in 2017.
The tax watchdog determined that a number of contractors had been incorrectly working outside IR35.
As a result, the Home Office incurred a bill of £29.5 million to cover the cost of the tax HMRC claims to have lost, which was made up of missing Income Tax, National Insurance Contributions and interest.
A further £4 million penalty was then imposed on the department, after HMRC ruled that its implementation of the new off-payroll rules had been “careless.”
However, the accounts show that this fine was suspended for three months in order to give the department a chance to improve its procedures on IR35 compliance.
It’s not the first time a government department has been caught out by the taxman over IR35. Published accounts by the Department of Work and Pension also revealed it had received an £88 million tax bill, reported on by Contractor Weekly just last week.
Rebecca Seeley Harris, an employment lawyer and IR35 expert, said these tax bills highlight just “how difficult it is to make status assessments” and urged the government to “look again at the statutory test.”
She added: “The employment status case law, which underpins IR35 and the off-payroll working rules, are incredibly complex to understand for lawyers, let alone the layman.
“The problem I find is that because there is no certainty within the case law, even as an expert, it is difficult to guide the client in the right direction. There are, however, certain key factors and working practices that can be implemented to reduce the risk.
“More often than not I find that there is a problem with the drafting of the contract. This must be drafted or overseen by an employment status expert. There are nuances within the clauses that will make the difference to the end result.
“Also, the working practices have to be congruent with the contract. The client must stand back and keep the contractors at arm’s length. They are not a quasi-employee, so don’t treat them like one. If you want to control your contractors then put them on the payroll.”