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Third government body handed multi-million pound IR35 bill

HM Courts & Tribunal Service becomes third government department to be hit with enormous IR35 bill

The executive agency of the Ministry of Justice (MoJ) has been handed a £12.5 million IR35 bill for falling foul of the off-payroll rules, according to its annual report for 2020-21.

The bill related to mistakes made when determining the IR35 status of the contractors it engaged between 6th April 2017 and 5th April 2020.  

HM Courts & Tribunal Service’s annual report also shows that the department had two losses of over £300,000 in the last tax year, one of which was due to IR35 liabilities.

It confirmed that errors were made after IR35 reform was introduced in the public sector in April 2017.

HMRC asked the MoJ to ‘revisit’ its IR35 determinations

Public sector IR35 reform, which was the pilot project for changes enforced in the private sector in April 2021, shifted the responsibility for determining the IR35 status of contractors from the worker to the end-client.

HM Courts & Tribunal Service’s annual report for 2020/21 stated: “In 2019, HMRC challenged the MoJ to revisit employment status determinations for off-payroll workers engaged between 6 April 2017 and 5 April 2020, where we had previously concluded workers were operating outside of the off-payroll working rules. 

“This liability has crystallised and quantifies the contingent liability disclosed in the 2019-20 Annual Report and Accounts. As the department could have avoided these tax and NI payments if a different determination had originally been made, the liabilities are classified as fruitless.”

CEST tool used to assess IR35 status 

In response, experts have voiced concern given this is not the first time a government department has been issued a significant IR35 bill due to non-compliance. 

The Department for Work and Pensions (DWP) paid £87.9 million to the taxman after a review of its implementation of the off-payroll rules revealed “historic” mistakes.

And the Home Office was handed a £33.5 million bill, which included a £4 million penalty for its “careless” implementation of IR35 reform. 

The DWP and the HM Courts & Tribunal Service both used HMRC’s Check Employment Status for Tax (CEST) tool to determine whether a contractor fell inside or outside the scope of IR35.

Seb Maley, CEO at Qdos, said: “The question ‘who next?’ springs to mind. This is the third government body to reveal that it has been stung by a multi-million-pound IR35 tax liability. But 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.

“Here we have proof yet again that the taxman’s very own IR35 tool threatens compliance rather than ensuring it.”

IR35 bill of this size could ‘devastate’ private sector firms

Maley added that although the tax liability paid is “effectively wooden dollars”, as money is simply being passed from one government department to another, it would be a different story for a private sector firm.

“The sheer size of a tax bill like this could devastate a business”, he said.

“The staggering tax payments made by public sector bodies recently highlight how important it is that businesses ensure IR35 compliance, which is clearly a priority for HMRC right now.”

Meanwhile, Fred Hicks, Senior Policy and Communications Adviser at trade body, IPSE, urged the government to take these “embarrassing tax bills” as a sign of a need for real change.

Government must stop trying to ‘paper over cracks’ 

He said: “This is the latest in a string of eye-watering IR35 tax bills in the public sector, and yet another reminder of the overwhelming complexity of these rules. If government departments can’t apply the government’s own rules correctly, how can freelancers and businesses in the private sector be expected to do so?

“After being thrown into disarray by the changes earlier this year, contractors are still dealing with the mess caused by extending the changes to IR35 into the private sector. 

“Many are now reluctantly working for clients through unregulated umbrella companies; others have had little choice but to close their businesses and either seek employed roles or retire early.

“Right now, government needs to clear up the mess in the wake of IR35 and regulate the umbrella company sector. In the long term, though, it must stop trying to paper over the cracks in our tax system and instead launch a long-term overhaul to create a system that actually works for self-employed people.”

By Contractor Weekly

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11 thoughts on “Third government body handed multi-million pound IR35 bill”

  1. Johnny

    HMRC gains easy wins against accommodating government departments. Result, rigged case law ready for the real victims.
    I wonder if any of them appealed or simply rolled over.
    More corruption from Brexit Britain and its favourite barons.

  2. Gary Andrews

    Take note, the people of Afghanistan where sold sunny uplands too. Their eventual Brexit being the deal that Trump cut (them out of) and the planning “Britain Trump” failed to do when the writing was on the wall from that moment.

    Even two weeks ago Johnson was telling them all was well when the enemy was at the gates. He still thinks he can cut and run while having his media trumpet another great British success. The huge gulf between public perception and the reality on the ground doesn’t seem to matter anymore so long as social media cheerleaders whip up the home crowd into a patriotic frenzy.

    Some here still think he is doing a good job. Some even think Brexit is going well and the economy is thriving in the face of overwhelming evidence to the contrary. Some even think the “teething problems” are not permanent new rules, to the point of denying their own business losses and hardships.

    • Paul

      After 6 years of bickering and 6 months into Brexit no one outside of extremists can point to any non-trivial benefits without huge accompanying downsides.
      If we can’t be honest as a country about our situation we will never solve it. Pretending everything is fine = do nothing and suck it up, this lazy government’s default setting.

    • Gordon Bennett

      To qualify as a decision making member of government in this country you must have unquestioning faith in Brexit. It’s like putting flat Earthers in charge of NASA.

  3. M

    The bills themselves are wooden dollars so the objective must be to ground some precedent to go after eveyrone else based on a flawed premise (i.e your assessments are incorrect because we say so, even if we contradict ourselves.)

    The objective of the Gov (if it is about the money) could have easily been resolved by introducing a tax just for PSC’s – instead, we have this ridiculous and expensive theatre suffocating a once thriving element of the UK economy.

    HMRC have proved to be limited and uncreative thinkers – where did they think ‘all the money’ that contractors get goes ? Yes, back into the economy in one form or another.

    There is another agenda going on with this, Brexit etc and the destruction of the UK seems to be the objective.

  4. Paul

    It seems pretty obvious to me that HMRC are running a campaign to “scare” private companies into ditching freelance contractors, thereby forcing them to work through umbrella companies.

    This way, HMRC gets the employee level of NI and tax that IR35 was introduced to achieve.

  5. ian hill

    Complete farce from the UK government to sell the introduction of hiring contractors Inside IR35 to all Government agencies and also to the private sector.
    If a company wishes to hire IT contractors inside IR35 then a like for like day rate (Apples for Apples) needs to be 30% more.!
    Has the Chancellor increased all his Government agencies cap ex budgets by 30% to fund hiring inside IR35 ?
    Have the private sector increased their cap-ex budgets to hire contractors inside IR35 ?
    The answer is NO resulting in the contractor being shafted and forced into low day rates inside IR35. Total disruption resulting in Contractors going permmie, retiring or choosing other options. The IT contractor pool size and skillset is in decline .
    The UK Government have attempted to copy the Swiss Tax system for IT contractors, but failed dramatically to fund the 30% uplift required for a smooth transition.
    It will take a good few more years yet for Demand and supply to matchup………..

    • Johnny

      About a 300% uplift required to budget for the change to party approved outsourcers like our good friends at Atos, Capita, G4S and Serco.

  6. XY

    They’re playing games to make it seem as though the private sector should roll over, but none of these departments are challenging HMRC in court, which is where HMRC normally lose.

    Or, they take a couple of years to challenge someone and then go away (after being dense for a long time and not accepting that they’re wrong).

    Also, the rates I’m seeing now suggest that Inside IR35 is offering about 30-40% higher rates, so the bills these depts are getting probably only reflect the actual cost had they hired inside IR35 to start with.

    On that basis alone, a private firm would do better to stick the 30-40% difference in the bank and hire a company like Qdos to do its assessments, then fight HMRC all the way if necessary. They should actually make a substantial saving by doing this rather than rolling over to these obviously stage-managed internal charades.

    Private firms crunch the numbers and assess the risks. And they will go to court, which will be a very different ballgame from the patsies HMRC are dealing with now.

  7. Graham

    In short, the departments have correctly found contractors to be outside, and then have been told by an angry HMRC that all government departments were expected to find contractors inside, regardless of actual status. That’s how it reads to me.

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