A quick look for contractors at UKRI’s £36million tax bill from HMRC for IR35
The latest government body to be lumbered with a tax bill for IR35 non-compliance is the non-departmental funding body UK Research and Innovation (UKRI), and a bit like the body itself, the bill’s pretty large, writes Rebecca Seeley Harris of ReLegal Consulting.
What's stated in UK Research and Innovation's annual accounts
In its annual report and accounts for 2021-22, UKRI, which is responsible for the supporting the work of nine separate councils including Innovate UK, states it will have to pay £36million in income tax and NICs to HMRC.
The accounts state that the body’s social security costs “increased year-on-year; following a review of the IR35 status of monitoring & assessment officers engaged by Innovate UK.”
And UKRI has “concluded that some of these monitoring and assessment officers should have been considered to be inside the scope of IR35 regulations, and thus subject to income tax and national insurance contributions.”
The accounts add: “UKRI has estimated a liability related to these income tax and national insurance contributions for the period from 2018-19 to 2021-22 which is included in social security costs.”
How many UKRI contractors were inside IR35?
In relation to the number of people assessed as caught by IR35, there were 285, with only 65 not being caught.
It’s not clear from the accounts what the monitoring and assessment officers do but, it is assumed that Innovate UK had a system for making educated assessments and was taking “reasonable care.” There is no mention of penalties so, one could assume that HMRC has accepted that it was a mistake, rather than carelessness.
At the time of writing, it is not clear whether UKRI used HMRC’s Check Employment Status for Tax (CEST) tool. CEST is highly criticised in the contractor industry but, if used as part of a wider audit, the tool can be useful.
CEST does, however, probably need to have some further improvements and these are rumoured to be taking place. That said, despite the many who would like CEST to be better, no date for a release of ‘CEST 2.0’ has been disclosed.
A funding body for innovation and business growth. Hmm...
As I said at the top, the UKRI is a funding body that has nine different councils delivering innovation in the UK.
Through its councils UKRI “maintain and champion the creativity and vibrancy of disciplines and sector-specific priorities and communities.”
The councils “shape and deliver both sectoral and domain-specific support,” the government says. So, the money allocated by the UKRI is used, in part, to support the growth of the UK and to help it out of the current economic slump.
The chair of UKRI, Sir Andrew Mackenzie, has said “I have been particularly impressed by the organisation’s ability to direct spend towards areas that are the most immediately pressing and productive for the UK’s future while preserving commitments to the development of the skills the country requires for long term success.”
There is, then, an irony with this statement because HMRC have now effectively deprived the UKRI of £36million -- funds which could have gone towards supporting businesses and innovation.
High levels of IR35 non-compliance in central government
In the second report of session 2022-23 HMRC – Lessons from implementing IR35 reforms – the government responded to the Public Accounts Committee’s criticisms.
The PAC conclusion in May 2022 was that: “High levels of non-compliance in central government reflect poor implementation [of the off-payroll rules] by HMRC and other government bodies.”
The PAC recommendation was that HMRC should develop robust estimates of non-compliance for the public sector as a whole, and use this to identify areas where it can reduce the inherent challenge of complying with the reforms. For example, by improving its guidance and tools. The Revenue was told to adopt a similar approach for the private sector as the IR35 reforms bed-in. And it was told to write to the PAC with an update in six months’ time.
All eyes on December 2023, with HMRC's IR35 response to the PAC
The government agreed in September 2022 with PAC’s recommendations and the target implementation for this is December 2023. That’s too late unfortunately for UKRI and many others in the public sector.
HMRC apparently undertook an extensive programme of customer education and support during the implementation of the IR35 reforms, and it already provides additional support to address inherent challenges faced by customers where these are identified. For example, in response to customer insight gathered from a range of sources, HMRC has increased communications on contracted out services and international supply chains, including delivering webinars on both. And HMRC has produced flow charts for those who operate with supply chains that are not wholly within the UK.
This begs the question, how have these government departments and bodies got their IR35 assessments so very wrong, then, -- to the tune of nearly £300 million?
Time for the Revenue to reach out?
Perhaps HMRC needs some guidance itself, on employment status case law and how to educate government departments on taking “reasonable care” and making correct Status Determination Statements? Who knows; perhaps they ought to look to the private sector for some expert advice? They at least ought to do something -- especially if they want fewer of these humiliating own goal-type off-payroll outcomes in the future where public money gets moved from one Whitehall coffer to another Whitehall coffer, because getting the Revenue’s IR35 rules right is seemingly too difficult and in this case, has adverse effects on both ordinary taxpayers and businesses alike.