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.
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.”
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.”
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.
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.”