What can businesses learn from government’s £263m IR35 bills? 

IR35, Tax

Focusing on the wider implications of HMRC’s IR35 compliance activity in the public sector

Last month, a damning report on IR35 reform was published. Amongst other things, this comprehensive document – compiled by the Public Accounts Committee (PAC) – highlighted the staggering £263m worth of IR35 bills that government departments have been issued in the past year. 

This evidenced the deep-rooted problems encountered by organisations following IR35 reform and was one of the key takeaways from the PAC’s report, ‘Lessons from implementing IR35 reforms’

Other findings in this highly critical review included; CEST’s flaws, the difficulty contractors have in overturning incorrect IR35 determinations and the need for HMRC to assess the impact of IR35 reform on the labour market. 

Needless to say, the report struck a chord with contractors. But it also caught the attention of many businesses, that now find themselves responsible for IR35. Some of the 3000 or so organisations that Qdos supports with IR35 have even been in touch, wanting to know what this might mean for them. 

In this article, we answer this very question – exploring the wider implications of the staggering £263m IR35 bills issued by HMRC to five government departments, including the Department of Work and Pensions, the Ministry of Justice and Defra. 

 

CEST endangers IR35 compliance 

It didn’t take long for it to become clear that each of these departments had used HMRC’s Check Employment Status for Tax (CEST) tool in some capacity to determine the IR35 status of contractors. 

CEST’s flaws have been well documented since its hurried launch weeks before the introduction of IR35 reform in the public sector in 2017. But the £263m figure is arguably the final nail in CEST’s coffin, offering proof of the true cost of relying solely on this flawed IR35 technology.

 

IR35 must be managed with care

The Ministry of Justice (MOJ) was hit with a tax bill to the tune of £72.1m for non-compliance between 2017 and 2020, with HMRC particularly critical of the department’s “careless application” of the rules.

Above all else, and in addition to emphasising the importance of expert IR35 status assessments, it’s a reminder that IR35 compliance deserves careful thought, ongoing education and adequate resource. 

From training and workshops to a fully traceable audit process and the reassessment of contractors who are engaged beyond six months, the better equipped a business is to ensure its compliance and shut down an IR35 enquiry. 

 

Penalties can be applied

But why does it matter if HMRC takes the view that a business has been careless in its approach to IR35? The multi-million-pound penalties issued in the public sector – including £15m handed to the MOJ – highlight how seriously the tax office takes a lax approach to IR35 compliance. 

In the private sector, following the end of the 12-month ‘soft landing’ in April 2022, HMRC has the remit to hit private sector businesses with penalties and fines, should the tax authority find that a company has been careless or worse, deliberately abused the rules. 

 

HMRC is prioritising compliance 

IR35 is clearly an agenda topping issue for HMRC. In addition to reforming the rules in recent years, the tax office has pursued high-profile freelancers – including Eamonn Holmes, Lorraine Kelly, and Gary Lineker – for huge tax liabilities. 

Given the tax office is also actively contacting private sector businesses regarding IR35 compliance, the figures published by the PAC are another sign that these recently reformed tax rules remain a priority for the Treasury. 

 

Mistakes can be very costly 

A publicly-funded government department owing HMRC millions in tax is very different to a private sector business in the same situation. However, the sums reported by the PAC – which few privately run companies would be in a position to absorb as easily – show just how costly non-compliance can be. 

Therefore, and as HMRC continues to ramp up compliance activity in the private sector, the need for businesses to protect their financial interests with IR35 insurance is paramount.

Qdos are leading IR35 experts with over two decades’ experience in defending cases. We have supported over 2,200 end clients and the agencies which place them to fairly and compliantly assess the IR35 status of their PSC workers, whilst confidently insuring the results, via our award-winning Qdos Status Review service.

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