The Government has been humiliated for a third time as the HM Courts & Tribunal Service (HMCTS) has had to pay out £12.5 million in tax arrears, and interest on those arrears, on account of IR35 failings. This follows is the wake of similar IR35 failings on the part of the Home Office and the Department for Work and Pensions (DWP), which resulted in huge tax bills
IR35 Failings
The Government's embarassment over IR35 failings began when the Department for Work and Pensions (DWP) had to pay out £87.9 million in tax arrears, and interest on those arrears, on account of failures in its IR35 procedures in terms of identifying the correct employment status of its contractors between 2017-20. This was despite having used HMRC’s online Check Employment Status Tool (CEST) to conduct the employment status assessments, a tool considered by many to be defective
The was followed a short while later by the revelation that the Home Office had been found liable by HMRC for exactly the same IR35 failings, and that they had to pay out £29.5 million in tax arrears, and interest on those arrears.
Now the Government's humiliation over IR35 has been compounded even further with news that HMCTS has also been found to be guilty of exactly the same IR35 failings, and has had to pay out £12.5 million in tax arrears, and interest on those arrears
The Check Employment Status Tool (CEST)
There is a common theme that runs through the IR35 failings by the DWP, the HMCTS, and the Home Office, and that is that they all relied upon the widely derided HMRC CEST tool. The tool is regarded by many as defective, with 42% of assessments found to be inaccurate.
In a report published by ContractorCalculator, they found that CEST was "not fit for purpose" and "hopelessly unreliable and biased." Indeed, Philip Manley, the co-author of the report, and a former HMRC inspector, stated: "Unless HMRC can disprove the substantial evidence demonstrating CEST’s shortcomings, then it’s clear that CEST is not fit for purpose." And to reiterate what we have said before, one has to ask the question that given that three of the Government’s very own departments and agencies cannot correctly identify the employment status of its own contractors using CEST, how does it expect anybody else to do so?
Reaction to the IR35 Failings
Responding to the news that HMCTS has been found liable for the same IR35 failings that the DWP and the Home Office were guilty of, the CEO of Qdos, Seb Maley, stated: "The question ‘who next?’ springs to mind. This is the third government body to reveal that it has been stung by a multi-million pound IR35 tax liability. But given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made."
Maley added: "Here we have proof yet again that the taxman’s very own IR35 tool threatens compliance rather than ensuring it. Businesses should avoid it altogether or at the very least get a second opinion on every answer it provides."
Maley concluded: "As a government body, the £12.5m in tax liability paid is effectively wooden dollars - money passing from one department to another. But it would be a different story for a private sector firm, and the sheer size of a tax bill like this could devastate a business. The staggering tax payments made by public sector bodies recently highlight how important it is that businesses ensure IR35 compliance, which is clearly a priority for HMRC right now."
The CEO of IR35 Shield, Dave Chaplin, was equally scathing in his views of CEST. He stated: "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 £12million 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."
Chaplin added: "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. 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. 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."
Chaplin further advises that: "It is crucial that once you hire a worker on an 'outside IR35' basis that you continue to monitor the status throughout the engagement. 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."
