IR35 reform four months in, and it’s an Olympic-sized win for HM Treasury
If you have wondered in between watching Tokyo 2021 on this four-month anniversary of the off-payroll rules why the government pressed ahead with reforming IR35, despite serious concerns expressed by MPs, the House of Lords and experts, all is now being revealed by way of the various ministerial department’s accounts, writes Kate Cottrell, founder of IR35 advisory Bauer & Cottrell.
IR35 tax bills hit the DWP and the Home Office
First out the starting blocks for an Olympic-sized run-in with HMRC is the DWP, as it has been hit with a record-breaking £87.9million tax bill, spanning some four years.
The work and pensions department is closely followed by the Home Office, hit by the Revenue with a small Olympic park redevelopment-esque sum of £29.5million -- in tax and NIC owed after the department admitted being “careless” when carrying out its IR35 assessments.
What a win for the exchequer! But believe it or not, it’s likely another department other than the Department of Health (which came a cropper of HMRC’s IR35 tool CEST back in 2019) will take the bronze medal, for having third biggest IR35 tax bill.
In fact, the DWP and Home Office are likely to be only the tip of the iceberg. Scrutiny of all other central government departments’ accounts will no doubt refer to any errors (careless or otherwise) from their handling of their off-payroll responsibilities. Overall, I’d bet that the amounts of revenue thanks to IR35 running into HMT will be Olympian.
A predicament for the Right Hon. Jesse Norman MP?
Time and time again Mr Norman defended the new rules in the House of Commons with the same line about folk 'working like employees paying the right amount of tax.'
Clearly, the minister would have been briefed on what HMRC were doing in the public sector (i.e. overturning internal IR35 status decisions, discovering enormous compliance issues and underpayments). How could he say anything other than this new measure is fair and should be rolled out to the private sector?!
HMRC’s predicament - CEST had to be defended
HMRC’s findings in these departments relied entirely on HMRC’s interpretation of case law and in turn, its CEST tool being ‘used correctly.’ They found that the tool had in fact been used incorrectly and overturned the original findings. So similarly, how could they possibly own up to any shortcomings in the CEST tool, while still trying to settle such enormous sums with the departments?!
Why was HMRC’s public sector research wholly inadequate?
We can only guess at the answer to this (assuming you remember the ‘research’ at all). But just imagine if they had undertaken comprehensive research across all government departments. It would be rather tricky if many departments were mid compliance investigation, arguing about status issues and eye-watering underpayments!
What lessons can the private sector learn from these revelations?
These disclosures and the public sector experience of the off-payroll rules over the last four years shows us what we can expect from HMRC:
- Businesses are not ‘safe’ for at least four years and need to ensure that they constantly address and monitor their procedures, whenever engaging a contractor and throughout the length of the contractor’s engagement.
- The private sector will be treated the same as the public sector. We may have a 12-month ‘soft landing’ underway from HMRC, but the tax authority will still target businesses and attempt to overturn Status Determinations.
- HMRC will not stand by CEST results unless they have had a hand in the completion of the questions (not something the department openly admits but increasingly the case). The CEST tool always was and remains unfit for purpose and it or any other status-testing tool should not be relied upon in isolation.
- HMRC has suspended the Home Office’s IR35 tax bill for three months, providing the department improves its off-payroll compliance procedures.That is a lot of money to shelve and an excellent reason for all businesses (large, medium, and small) to take another look at how they are managing all things off-payroll.
- Beware of indemnity clauses in contracts. For example, a public sector body contract with an agency will include such an indemnity, which would in turn flow down to the contractor. It remains to be seen on the enforceability of such indemnities or if indeed the public body will attempt to pass down the liabilities.
- Businesses of all sizes should have access to IR35 specialists who can advise on processes, assist with implementation and ongoing ‘due diligence.’ Such specialists will know the case law inside out and have the confidence to defend cases with a successful track record of winning cases against HMRC. Specialists can also help with the management of contractor expectations. Please be very wary of people and characters in the contractor community passing themselves off as specialists and ‘experts’ on IR35. I’d suggest most of the experts you want the assessment of are too busy assessing real contracts!
What are the lessons for contractors as IR35 reform turns four-months-old?
- Those engaged outside IR35 in the public sector need to consider what will happen when HMRC investigates. And they should gauge the implications for themselves. Just because the contractor would not be liable (that said, look out for any indemnities in your contract and get them removed), that is no reason to simply sit back, not least because if the status changes from ‘outside’ to ‘inside’ this can cause a lot of accounting issues.
- HMRC has stated that where a contractor was previously outside IR35 and now found inside (from April 6th 2021), they will not investigate the past period. However, there is absolutely nothing to stop them doing exactly the opposite – i.e investigating. So it is worth checking or re-checking any previously declared outside IR35 position.
- Don’t take your eye off the IR35/off-payroll ball! Always do your own ‘due diligence.’ If you are working for a small company and currently unaffected by the 2021 framework, get all the necessary details in writing.
- Try to understand all the rules yourself and do not be afraid to challenge a Status Determination.
On the home straight?
Even if you think you are, don't get complacent. Keep taking notice, continue to check out your own position, play about with a status tool AND above all else, take advice from the right people.