Tax bill is higher than expected and raises further concerns about the accuracy of CEST
The Government Department for Environment, Food & Rural Affairs (Defra) has paid a total of £86.5m in backdated taxes to HMRC, after a lengthy investigation into historic cases of IR35 non-compliance.
As first reported in Computer Weekly, Defra was found to have been non-compliant between April 2017 – the year that IR35 reform was implemented in the public sector – and March 2022.
The total tax bill for non-compliance equates to around £16m annually for five years, excluding the £4m interest due. The sum is higher than the £63.2m that the department expected to receive, which it set out in its annual accounts for 2021/22.
In the Defra case, non-compliance was largely due to the use of the Check Employment Status for Tax (CEST) tool, which the body relied on when determining the IR35 status of contractors.
Other government departments – including the Ministry of Justice and the Department for Work and Pensions (DWP) – have also been subject to investigations for IR35 non-compliance. Collectively, the IR35 bills issued to government departments amount to more than £250m.
Defra case confirms CEST not fit for purpose
The news is another blow to the credibility of HMRC’s CEST tool, which was under the spotlight in a review by the Public Accounts Committee (PAC) earlier this year.
Highlighting issues with the tool, the review found that:
“some questions within CEST were difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself”.
The review also questioned the extent of non-compliance across central government, “considering government departments should be in a good place to understand the rules and communicate with HMRC”.
‘Eye watering’ bill highlights complexity of IR35
Andy Chamberlain, Director of Policy of IPSE, called Defra’s final tax bill “eye-watering”.
He also said that the case provided “further evidence that the IR35 rules are extremely difficult to comply with”, and criticised the tax office for its approach to recovering taxes.
“Firstly, it seems rather pointless to collect tax from a public authority that ultimately gets its funding from the same pot that HMRC is trying to fill.
“It is not at all clear that the taxpayer is any better off as a result of all the time and effort that has been put into generating this bill – in fact, there is a distinct possibility that the opposite is true”.
Government failing to support freelancers and contractors
Chamberlain also suggested that “HMRC may believe that incorrect determinations have been made, but that doesn’t necessarily make it so”.
“Were this a private sector company, it is likely that HMRC’s view would be challenged in the courts. Sadly that is very unlikely to happen with public authorities, which means HMRC can bully them into avoiding contractors altogether. This is bad news for the departments and bad news for public services”, he concluded.
Chamberlain’s comments and the Defra tax bill follow the Truss government’s repeal of IR35 reform, effective April 2023 – a move abandoned almost as unexpectedly as it was announced, by the new Chancellor, Jeremy Hunt.
However, cancelling the repeal was simply a precursor to more bad news for contractors during the government’s Autumn Statement last week, which reduced the tax-free dividend allowance and Capital Gains Tax annual exemption.
These reductions harden an already aggressive tax regime against contractors and small businesses, with the Chartered Institute of Taxation suggesting the move will “increase the administrative burden on taxpayers and HMRC alike”.