Defra hit with £48million tax bill over IR35 status ‘inaccuracies’

Defra has become the fifth ministerial department to admit getting the government’s own IR35 rules wrong, landing it with an HMRC liability of a hefty £48million.

Since four other departments similarly bodged their IR35 tests having also used CEST, one of the four – the MoJ, has seen its liability for off-payroll errors shoot up from £12.5m to £72m.

In total, the HMRC pay-outs from the five departments (which as ‘end-users’ under the April 2017 IR35 rules pay tax, NICs, penalties and interest) stands at a massive £244million.

It includes the DoH’s £4.3m bill of 2018/19; £87m and £33m in the accounts of the DWP and Home Office respectively, and the new £120m total in the MoJ and Defra 20/21 accounts.

'Tip of the iceberg'

Back when just the bills of the health department, Home Office and DWP for fluffing IR35 emerged, status advisory Qdos said it begged the question ‘Which department next?’

And on the four-month anniversary of the private sector rules (which are based on the 2017 rules), IR35 firm Bauer & Cottrell said the bills likely represented ‘just the tip of the iceberg.’

Defra and MoJ now racking up £120million between them for incorrectly assessing PSCs as outside IR35 when they were inside IR35, smacks of vindication for both advisories.

But for contractors and private sector organisations engaging PSCs, it represents an ominous beginning to 2022, particularly with HMRC’s ‘light-touch’ expiring in April.

'Expect protracted tussles with HMRC'

Such is the implied warning from the UK’s contractor trade group, the Association of Independent Professionals and the Self-Employed, asked yesterday about the £244m bill.

“Hiring organisations that have tried their best to comply should [now] expect to be involved in protracted tussles with HMRC over whether or not they have applied these complex rules correctly,” the association’s Andy Chamberlain told ContractorUK.

He caveated it was just “the view of HMRC” that the five departments failed on off-payroll compliance, yet whether commercial engagers will have the stomach to fight is questionable.

'Crippling'

IPSE’s policy director, Mr Chamberlain explained, frustratedly: “Is this really what we want UK businesses to be focussed on? As they attempt to trade out of a crippling recession?”

But it’s not just challenging HMRC which stands to impact end-users -- there’s a payment ‘back and forth’ to the Revenue to endure, plus contractor redeployment and reassessment.

For example, Defra in its accounts says that while it initially paid HMRC some £19million in March 2021, because it “accepted” its IR35 “inaccuracies”, the liability later rose to £48m.

'Six per cent outside IR35'

“The work done on reassessments has decreased the proportion of contractors outside IR35 from 85 per cent to 22 per cent of all current contractors,” the department began.

“[But] since the 31 March 2021, work on reassessing contractor’s [sic] IR35 statuses has continued. This has led to additional contractors being reassessed as inside IR35.

“In addition to this, some of the assumptions made in the initial calculation have recently been clarified with HMRC, which will also affect the liability. The remaining liability now stands at £48 million, based on six per cent of contractors remaining outside IR35.”

Further worryingly for any private sector outfit hoping to calculate potential liabilities if they err with IR35 (whether they use HMRC’s own tool like the five departments did or not), Defra adds: “Work is continuing to agree the final liability with HMRC.”

'MoJ fined for careless application of IR35 rules'

The MoJ is similarly-sized, in that it works with 34 agencies and bodies versus defra’s 33 agencies and bodies, but it has forked out almost twice as much for IR35 blunders.

The department previously declared a £12.5m liability to HMRC because the ultimate arbiter of status decisions, HM Courts and Tribunal Service, also got IR35 wrong.

But even more embarrassing, the Ministry of Justice has been slapped with an HMRC penalty of £15million owing to the IR35 errors, because its officials were “careless” in applying the 2017 rules.

'Complicated and confusing'

In its accounts, the MoJ moved to clarify: “That penalty has been suspended for three months subject to certain conditions and is therefore not included within the losses total.

“The conditions relate to meeting the department’s notification and filing
obligations, a 100% assurance check on all out of scope determinations, and improved training of hiring managers. The department expects to meet those conditions.”

IPSE said: “The fact that two major government departments have run into trouble with their IR35 compliance shows just how complicated and confusing the regulations are.

“Even with guidance, support and training from HMRC, the MoJ and Defra have not made accurate status determinations – in the view of HMRC at least. Private sector organisations that aren’t as connected to HMRC will almost certainly find it equally challenging.”