Multi-million-pound IR35 penalties highlight need for advice

Changes to off-working payroll rules continue to cause compliance issues and with a third public body hit with a multi-million-pound penalty, businesses are urged to take advice.

HMRC has issued HM Courts and Tribunal Service with a £12.5m tax bill over mismanagement of IR35 legislation. It is the latest Government body to be hit with a huge tax penalty, after the Department for Works and Pensions (DWP) and the Home Office were also pulled up.

DWP was issued with an £87.9m penalty in July for not correctly determining the status of contractors since 2017 when the rules changed for Personal Service Companies (PSCs) contracting with public bodies. Reports also suggest the Home Office’s “careless” IR35 failings led to it being issued with a £33.5m tax bill.

IR35 rules for individuals operating through PSCs were introduced in 2000 and have been updated a number of times since. The latest reform, in April 2021, requires medium and large businesses to determine the employment status of contractors they hire for tax purposes, whereas this was previously assessed by the contractor.

Given that Government departments are being caught out by the changes, it highlights the need for businesses to take professional advice around this area of employment law. It is not as straightforward as one might think and so it is worth ensuring you are not caught out.

One of the reasons for public sector bodies getting into difficulty, I believe, is that the CEST tool wasn’t fit for purpose when this legislation was implemented.

HMRC has worked with stakeholders to improve the tool but, unfortunately, there are still too many occasions where it doesn’t provide a status determination leaving businesses to rely on other avenues to decide whether off payroll working rules apply.

Seeking advice if unsure is vital but also gathering the right information is crucial. If what you put into a system isn’t right you will not get the right answer out of it. There are some real complications with this legislation, not least determining who is ultimately responsible for the decision. It is no good passing the buck to another link in the chain if you are responsible as the penalties for incorrect assessment or application of the rules will fall to the one at the top of the chain.

There was a push before the pandemic, going all the way to the House of Lords, for a delay in bringing in the legislation for the private sector - mainly down to the lack of confidence in the tool provided.