Trying to get your head around IR35? So are the Home Office and DWP.
Both the Home Office and Department for Work and Pensions (DWP) have recently been hit with massive tax bills from HMRC for failing to properly determine the tax status of their contractors. The bill for the Home Office is reportedly £29.5 million, while the DWP will have to fork out £87.9 million for income tax, national insurance contributions, and interest dating back to 2017.
Since 2017, public sector end-users have been responsible for determining the tax status of the contractors they hire. It is up to them, rather than the contractors themselves or HMRC, to decide whether a contractor is genuinely self-employed or, in reality, an employee.
This is referred to as IR35 or the off-payroll rules. If the contractor is genuinely self-employed, they are outside IR35 of “off-payroll.” If they are in reality an employee for tax purposes (in effect, deemed by the end-user to be an employee), they are inside IR35 and the end-user will be responsible for deducting income tax and National Insurance contributions at source.
In April this year, the obligation on end-users was extended to the private sector and now also applies to medium and large sized businesses.
Here is the kicker - the DWP reportedly used HMRC’s own online CEST tool (or Check Employment Status for Tax) to determine the tax status of its contractors.
According to the government website, the CEST tool is supposed to give users: “HMRC’s view of a worker’s employment status, based on the information you provide.” DWP apparently used the tool, decided their workers were off-payroll, but still got landed with a huge bill years later for making the wrong decision. In the Home Office’s case, their bill reportedly came because their assessment was “careless.”
This is a lesson for those in the public and private sector who use contractors to be very careful when hiring contractors when there is any uncertainty about whether someone is genuinely self-employed or not.
Some people think it’s enough to put a written contract in place which says the person is self-employed. That certainly isn’t enough. Contracts can be disregarded by the courts and tribunals if they don’t reflect the reality of the actual working arrangements.
Clearly, in light of these cases, CEST alone cannot be relied upon either. It depends on the rights answers being given in the first place and, even then, there may be nuances in the working arrangements that CEST does not see.
If this affects your business and you are in any doubt, our strong advice is to speak to your accountant or tax adviser. It won’t be many businesses that can survive a gigantic tax bill like this!
Source: HMRC hits Home Office with £33.5m bill over ‘careless’ application of IR35 rules (computerweekly.com)
