Ministry of Justice falls foul of IR35, forking out £12.5million to HMRC

A third government department has admitted that its mistakes in trying to comply with the tax office’s IR35 off-payroll rules run into the millions of pounds.

The admission by the Ministry of Justice on behalf of its HM Courts and Tribunal Service that it incurred £12.5m for “incorrect” IR35 determinations takes the total which HMRC has netted from the public sector trio to £135million.

Tax expert Graham Webber, who made the estimate given IR35 errors at the DWP and Home Office of £87m and £30m respectively, says “the message is clear” -- that using CEST (as all three departments did), “will offer no protection [from HMRC].”

'MoJ, DWP, Home Office -- they all got IR35 wrong'

The £135m total allows for potential fines and penalties on top of the headline tax and NI payments, because HMRC’s other message is that despite using CEST, all three “got it wrong”, posted Mr Webber, tax director at WTT Consulting.

But there is another message about this growing “debacle,” and it ought to be aimed at HMRC from the contractor sector, says Kate Cottrell, who specialises in contractor status.

“It is now time for HMRC to come clean and advise us what exactly these [three] departments got wrong when using CEST.

“If HMRC attempt to claims customer confidentiality, as a reason for not telling all, that will be disgraceful.”

'Officials must now give companies CEST assurance'

Ms Cottrell, who heads IR35 contract reviews at Bauer & Cottrell continued yesterday: “It’s high time HMRC realised that the integrity -- if there is any left -- of CEST is now on the line. 

“HMRC and HMT have to give assurance now to the private sector that they can have confidence in the tool. If both the public and private sectors have to re-do their assessments, this will be catastrophic for many.”

A former tax inspector, Cottrell was referring to the exorbitant sums HMRC has deemed to be owed for incorrectly using its status tool  -- sums which would easily sink medium and even large companies covered by the April 6th 2021 framework (-- the private sector version of the April 6th 2017 framework which all three departments have now fallen foul of).

'Doubly taxing'

She isn’t alone in wanting the taxman to talk specifics. “It's a pity that the [HM CTS] report does not say what happened with the individuals involved,” says WTT’s Mr Webber.

“[These contractors] presumably paid their own tax at the time, and now the Tribunals Service has paid it again.”

However as a government body, the £12.5m in tax liability paid by HM CTS for getting IR35 wrong is effectively “wooden dollars,” according to Qdos chief executive Seb Maley.

“[This is] money passing from one department to another,” he said. “It would be a different story for a private sector firm, and the sheer size of a tax bill like this could devastate a business.”

'Challenged by HMRC'

In its latest annual accounts, HM Courts and Tribunal service says its paid the IR35 “liabilities” after HMRC “challenged” the MoJ to revisit IR35 assessment it had made.

“[These] status determinations [were] for off-payroll workers engaged between 6 April 2017 and 5 April 2020,” states the department, adding:

“We had previously concluded [that these] workers were operating outside of the off-payroll working rules.”

'Which department next?'

On top of his ‘wooden dollar’ characterisation (nonetheless representing one of just two losses incurred by the MoJ in excess of £300,000), Mr Maley said that, with the Department of Health, Home Office and DWP already stung over IR35, it begs the question ‘Which government department next?’

This is why the onus is on the Revenue to come forward and clarify, to head off inevitably more costly mistakes which could be avoided.

'This is taxpayers' money, not theirs to fritter away'

Ms Cottrell explained her assessment: “HMRC needs to realise that bombarding employers with off-payroll webinars week-in, week-out, is no substitute for accurate, reliable results.

“Once we have all the public department’s accounts in and filed, there will no doubt be many more [departments], revealing further millions of pounds owing to HMRC. 

"It may be ‘robbing Peter to pay Paul’ but this is taxpayers’ money and not theirs to fritter away, as they wish. Answers are needed, now.”