HM Courts and Tribunals Service has become the latest government department to fall foul of IR35 rules.
The department was hit with a £12.5 million tax bill by HMRC in relation to incorrect assessments of workers’ employment status, according to its annual report for 2020/21.
In 2019, the Ministry of Justice was told to revisit employment status determinations made between April 2017 and April 2020.
The tax liabilities related to undisclosed number of workers who were previously concluded as operating outside of the off-payroll working rules by HMRC’s Check Employment Status for Tax (CEST) tool.
Dave Chaplin, CEO of compliance platform IR35 Shield said HMRC’s CEST tool was “failing fast” – particularly due to its over-reliance on substitution.
“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,” said Chaplin.
“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 said it was crucial that firms continued to monitor IR35 status throughout a contractor’s 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,” he said.
Seb Maley, CEO at IR35 advice Qdos, said: “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.”