Ask Andy: What aspects can affect an IR35 assessment?
This month, Andy’s received quite a few questions on which particulars of an engagement can affect an IR35 assessment. It…
The Home Office are the latest Government body to be subject to an IR35 bill, following on from the recent £87.9 million IR35 tax bill owed by the Department of Work and Pensions (DWP). In a recent report, it was revealed that the Home Office owes HMRC £29.5 million, which has been calculated by HMRC as the amount lost in tax and national insurance from the years April 2017-18 up until 2020-2021.
These dates coincide with the off-payroll working reforms, otherwise known as IR35, which came into play in the public sector on the 6th April 2017. The report notes that the Home Office had “agreed tax liabilities relating to incorrect assessment of contractors under IR35.” In addition, HMRC has applied a suspended penalty of £4 million.
Home Office receives a suspended IR35 penalty
Kingsbridge’s Head of Tax and IR35 expert, Andy Vessey notes that “HMRC has suspended a £4 million penalty for carelessness inaccuracies, which means that HMRC considered the Home Office did not take reasonable care when making their status determinations.” The report states that HMRC found that the Home Office had been ‘careless’ in the application of the off-payroll working rules.
Vessey explains that “suspended penalties lend themselves to instances where HMRC can impose conditions to remove the cause for the penalty arising again in the future. For example, system or process-related failures which lead to a penalty may give good grounds for suspension. HMRC views suspension as a means of encouraging compliance from those who do not set out to deliberately evade tax.”
The suspended penalty length is 3 months, so if the Home Office can satisfy the conditions outlined by HMRC within this period, then the £4 million in penalties would be wiped. Vessey goes on to explain that “HMRC sees suspension as appropriate where there have been weaknesses in systems and/or record-keeping which could be repeated. HMRC does not regard suspensions as a deterrent to future non-compliance in one-off situations where there would be no opportunity to demonstrate that compliance can be improved.”
What are the Home Office penalty conditions?
“A period of suspension can be up to 24 months, but in the Home Office’s case this has been limited to 3 months, which suggests that HMRC believe the Home Offices shortcomings can be rectified in that time”, Vessey remarks.
The suspension conditions relate to meeting ongoing compliance deadlines and making sure that any tax liability is settled on time during the specified period of suspension. To rectify the issues HMRC found, the Home Office will need to meet “notification and filing obligations, a 100% assurance check on all out of scope determinations, improved governance around the use of contractors and contingent labour, improved training of hiring managers and improved monitoring and assurance over compliance with IR35, not just at the point of procurement but throughout the contract life-cycle.”
The Home Office will have to satisfy all of these metrics for the penalty to be waivered, with Vessey commenting that “if one of the conditions fails or if the taxpayer becomes liable to another penalty during the period of suspension, then the suspension will lapse and the penalty will become payable immediately.”
For recruiters and clients, monitoring of IR35 status could be key
Notably, as specified in the report, one of the conditions imposed by HMRC is that improved monitoring and assurance is required not just at the point of the initial engagement, but throughout the contract life-cycle. Vessey warns that this should be “a timely reminder to all organisations who hire contractors to monitor their employment status with reasonable frequency.”
Home Office follows DWP in tax fine
The Home Office follows the Government Body, the DWP, in an IR35 tax fine. In the case of DWP, they were using CEST to ascertain a contractors status, but what is not currently known is exactly what errors DWP made, which resulted in the large sum being owed. With both the DWP and the Home Office being investigated in quick succession, Vessey suspects that it may not be too long before we see another Government department investigated by HMRC.
“I suspect that the DWP and Home Office may not be the only government departments to have faltered in their off-payroll obligations, andwouldn’t be surprised to learn of other public sector organisations being hit with PAYE and NIC arrears in the near future.”
Recruiters and Clients must consider IR35
With these recent cases and continuous questions over the reliability of the CEST tool, recruiters and clients should consider if CEST is necessarily the best option for them. At the end of June, data released by HMRC revealed that over 210,000 uses of the CEST tool from November 2019 to May 2021 resulted in an indeterminate result, making up 21% of total uses of the tool during this time frame.
If you are on the lookout for another solution to assess IR35 status, one option is Kingsbridge’s award-winning IR35 status tool. Developed by Andy Vessey himself, the tool has been designed to offer a comprehensive and clear tool for recruiters, clients and contractors alike. To find out more about the tool, click here or email ir35@kingsbridge.co.uk.
