Home Office fined by HMRC over incorrect IR35 assessments

Author Photo
Martin Baxter
02 Aug 2021 @ 01:58 pm
in category:

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

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

“I suspect that the DWP and Home Office may not be the only
government departments to have faltered in their off-payroll obligations, and
wouldn’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

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
 or email ir35@kingsbridge.co.uk.