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Government documents have revealed that the HM Courts and Tribunal Service has been hit with a £12m IR35 bill*.
The latest news comes hot on the heels of the other government departments who have made the headlines recently, namely the Department of Work and Pensions hit with an £87m bill and the Home Office hit with a £29m bill.
Why does this keep happening and who will ultimately pay the bills?
Commenting on the latest “CEST casualty” Dave Chaplin, CEO of IR35 Shield said: “HMRC’s CEST tool is failing fast and now we are hearing of yet one more government department, HM Courts and Tribunal Service, hit with a high tax bill to the tune of £12m because it has relied on CEST to assess its contracting workforce.
“One of CEST’s major flaws has been its over-reliance on substitution, which any defence expert knows is folly. Over the last few years, many industry experts have pointed out CEST’s failings to HMRC but those messages were ignored and now we are witnessing the fallout and financial damage,” says Chaplin.
What to do if you have used the CEST tool?
“My advice to anyone who has used CEST is to revisit your determinations and if they rely on a valid right to substitute then seek advice on the correct interpretation of the law,” says Chaplin. “Also, recheck the status with the assumption that the substitution clause is not valid, to make sure you have not also been badly exposed due to the flaw.”
Moreover, the contractor specialist says it is crucial that once a company hires a worker on an “outside IR35” basis that they continue to monitor the status throughout the engagement.
Chaplin suggests: “Regular checking and gathering contemporaneous evidence are crucial in forming a pre-emptive defence. Poor assessment decisions left alone, without any evidence to back them up, can prove costly as we are seeing with these recent governmental departments.”
Seb Maley, CEO of Qdos, a specialist contractor and IR35 insurer responds to reader questions:
FI: Are the IR35 penalty-related tax bills ultimately being paid with taxpayer money?
SM: Given government departments are funded by tax, I imagine that these liabilities will ultimately be paid with taxpayer money.
FI: Will there be new budget deficits as a result of these tax bills for the government departments affected?
SM: Time will tell. But given these are government departments and not private sector businesses, I doubt the impact of a multi-million pound tax bill will be felt quite as much.
FI: Will certain departments have to reconsider contractor status if a replacement is not possible due to security clearance (embassies, defence, etc.)?
SM: Not necessarily. Departments can still continue to engage contractors even if the right of substitution is difficult – or even unachievable – due to security clearance. While a contractor being able to sub in another as and when is important to outside IR35 status, that’s not to say without this clause present a contractor definitely belongs inside IR35.
FI: Do you anticipate that more departments will be reporting similar IR35 related tax bills?
SM: Don’t rule it out. These bills were revealed in each department’s annual accounts report, so when more are published, I wouldn’t be surprised if HMRC has taken a close look at all government bodies.
FI: How will government departments avoid this from happening again? Will they be obligated to use CEST?
SM: Avoid CEST, for starters. The tool simply isn’t fit for purpose and ironically, endangers compliance. But while any other business is not obliged to use CEST and can and should consider alternatives, government bodies may find themselves under pressure to use the tool.
FI: Why should contractors and freelancers find this news relevant to them?
SM: IR35 compliance sits high on the agenda of HMRC who, despite the introduction of IR35 reform, is still able to investigate contracts that took place when contractors held the liability.
It’s a firm reminder of the importance of IR35 compliance and the threat this legislation poses, not just to businesses but also contractors.
🤔 We’d like to hear your thoughts on this story in our comments section.
*Links to HM Courts and Tribunal Service documents:
2019/20: Pages 42 and 83
2020/21: Page 57
What a shocker…. tax payers paying government depts tax liabilities because they fall foul of IR35 compliance. Wooden dollars swilling around to make HMRC look like it’s doing an effective and great job of collecting revenue.
IR35 is a disaster. Based on EU requirements it should certainly be scrapped. Its a lot of work, nothing positive and wrecking a whole industry.
If I am to be treated as an employee of a company for tax then where are my pension rights, paid holiday rights, sickness benefit et al?
I I dont get those I am not an employee.