Defra and MoJ rack up £120m IR35 tax bill between them

Defra and MoJ rack up £120m IR35 tax bill between them

Two more government departments face a tax bill that exceeds £120m for incorrect IR35 assessments

Despite following official guidance from HMRC, the Department for Environment, Food and Rural Affairs (Defra) and the Ministry of Justice (MoJ) are facing hefty fines for making errors when determining the IR35 status of contractors.

According to the annual reports and accounts for 2020-21 published last month, Defra owes the taxman £48 million and the MoJ owes £72.1 million.

In its report, Defra stated that HMRC launched an enquiry into its “compliance with the off-payroll working rules in relation to contingent labour in 2019.”

MoJ ‘careless’ in applying new IR35 rules

It said: “The enquiry is on-going, but it has determined there have been instances where contractors were incorrectly assessed as out of scope. 

“Defra has reassessed the majority of current contractors and estimated that tax and national insurance lost between 6 April 2017, when the rules came into force, and 31 March 2021, for these contractors, to be £19 million.”

While the government department claimed it accepted liability for the £19 million, further in the report, it noted that some of the “assumptions made in the initial calculations” were wrong and after clarifying with HMRC, the figure stands at £48 million.

The MoJ’s accounts revealed that the department, according to HMRC, “had been “careless” in its application of the off-payroll working workings” and as a result was hit with a penalty of £15 million in addition to the £72.1 million tax bill.

The penalty has been suspended for three months subject to certain conditions, which include, filing obligations, a 100 per cent assurance check on all assessments determined outside the scope of IR35 and improved training of hiring managers. 

Both departments admitted to using ‘flawed’ CEST tool

Both Defra and the MoJ admitted to using HMRC’s CEST tool to make determinations, which has been criticised as deeply flawed by industry experts.

Andy Chamberlain, director of policy at self-employed trade body, 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.  Private sector organisations that aren’t as connected to HMRC will almost certainly find it equally challenging.”

There are now five government departments that have been handed a multi-million bill for not complying with the off-payroll rules. Four of which, including the Department for Work and Pension and HM Courts and Tribunals Service, admitted to using the CEST tool to make its determinations.

Chamberlain added: “IPSE has long argued that CEST is critically flawed and that clients should not rely on it. The absence of any questions on mutuality of obligation and the over-emphasis on its poorly worded substitution question produces skewed results. 

“That these departments used the CEST tool and still fell foul of HMRC’s enforcement of the IR35 rules should serve as a warning to clients in the private sector.”

What does this mean for contractors?

HMRC has made it known that it is already carrying out IR35 compliance checks on businesses in the private sector. This is despite the rules only coming into effect in April last year. However, with reports of blanket IR35 assessment and inaccurate determinations widespread, many contractors continue to have their status reviewed by a specialist – an expert who can advise whether their client’s IR35 decision is accurate or not.

Contractors should also be aware that HMRC will continue investigating historic arrangements – contracts that took place before the introduction of IR35 reform and the shifting of the liability, from the contractor to the fee-paying party. With this in mind, IR35 defence insurance remains a core policy for contractors. 

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