Another UK government limb that can't get IR35 right: Court service pays taxman £12.5m
- Reference: 1629732545
- News link: https://www.theregister.co.uk/2021/08/23/uk_court_service_ir35/
- Source link:
Disclosed in the court service's [1]annual report [PDF], the payments were a result of a challenge from Her Majesty's Revenue & Customs (HMRC) to the Ministry of Justice's handling of IR35 rules between 6 April 2017 and 5 April 2020, which had concluded workers were operating outside of the off-payroll working rules.
Under IR35, contractors, many of whom work in IT, that are "deemed employees" by HMRC need to pay income tax and National Insurance as though they are employees but are not entitled to benefits such as holiday or sick pay.
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The government introduced changes to the IR35 rules that came into force in April 2021 and made large and medium-sized businesses responsible for determining the employment status of contractors for tax purposes, rather than the contractors themselves.
What is IR35?
IR35 is a tax reform that was unveiled in 1999 by the UK tax authorities. The latest regulation change will force medium and large businesses in the UK to set the tax status of their contractors and freelancers. Previously this was set by the contractors themselves.
Contractors found to be within the scope of the legislation – ie, inside IR35 – will have to pay more tax than they might expect.
The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees but avoid paying regular income tax and national income contributions by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.
The measure came into effect in the public sector in 2017. The British government hoped the reforms would recoup £440m by bringing 20,000 contractors in line.
HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimates the reforms will recoup £1.2bn a year by 2023.
In this case, the court service workers seem to have been miscategorised because of its use of the HMRC's Check Employment Status Tool (CEST), according to Seb Maley, CEO of Qdos, an advisory firm for contractors.
He pointed out that the Department of Work and Pensions had admitted an £87.9m IR35 liability and the Home Office paid £33.5m under similar circumstances.
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"Given that HMRC's fundamentally flawed CEST was used to decide the IR35 status of contract workers, I'm not in the least bit surprised that mistakes have been made," he said.
[5]Contractors argue umbrella companies need improved regulation, not outright ban
[6]Tax check tool CEST is the pits, say UK contractor consultancies as latest HMRC usage stats are published
[7]Tech contractor loses IR35 tribunal appeal: 'Right' to substitute didn't mean he could, say judges
[8]UK.gov finally proposes to police rogue umbrella companies but leaves questions unanswered
"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."
The CEST tool [9]has been slammed for returning inconclusive responses for one in five of the million-plus times it was called upon during a 16 months period.
Dave Chaplin, CEO of IR35 Shield, said: "HMRC's CEST tool is failing fast and now we are hearing of yet one more government department, because it has relied on CEST to assess its contracting workforce. 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."
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Her Majesty's Courts & Tribunal Service has been contacted for a response. ®
Updated to add at 15:48 UTC:
A Ministry of Justice spokesperson said: "Strict checks and extra controls have been introduced to ensure that tax rules are applied correctly."
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[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1002585/HMCTS_Annual_Report_and_Accounts_2020-21.pdf
[2] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YSPGN5CeJW0mXzoPBVG-OAAAAE0&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[3] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YSPGN5CeJW0mXzoPBVG-OAAAAE0&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
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[5] https://www.theregister.com/2021/07/30/umbrella_company_ban_regulation/
[6] https://www.theregister.com/2021/06/25/cest_usage_stats_ir35_contractors/
[7] https://www.theregister.com/2021/06/15/techie_robert_lee_loses_ir35_tribunal_appeal_to_hmrc/
[8] https://www.theregister.com/2021/06/10/uk_umbrella_company_regulations/
[9] https://www.theregister.com/2021/06/25/cest_usage_stats_ir35_contractors/
[10] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_offbeat/legal&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YSPGN5CeJW0mXzoPBVG-OAAAAE0&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[11] https://whitepapers.theregister.com/
Wedge
People don't seem to understand that Check Employment Status Tool (CEST) is essentially a lube that helped ram the legislation in. Nothing else.
It was supposed to give a notion that this tool will somewhat help protect genuine contractors from being caught by the legislation and only affect the so called disguised employees.
The problem is that the way the relationship is classed comes from the contract. If a company wants a worker to be inside IR35 then they write a contract that puts the worker in scope. The individual circumstances of a contractor don't matter at all.
Since you only have a penalty if you wrongly declare the worker out of scope, there is a huge incentive to make sure each worker is in scope.
In that regard the CEST tool, sort of, can let you check if the legal team got the contract right.
To put a worker in scope, the contract needs only a few things - and usually a fettered substitution clause will suffice.
Essentially the tool hinges on substitution, and as we've seen from recent court cases that clause means hee haw if you can't actually exercise it (can't remember the specific case, but HMRC won an appeal recently because the substitution clause couldn't be exercised although it was in the contract). There are also a couple of cases coming up where the importance of MOO is key and CEST continues to ignore that assuming it exists in all engagements.
if you can't actually exercise it
It is assumed that if you have not exercised it then likely you can't. At least this is a HMRC position. They also look individually at each engagement - if you have exercised it with your previous client, it won't count for the current, one if you haven't.
They have even gone further - if you use someone as a substitute, that a client could find themselves to replace you, that also wouldn't count.
They basically want small business to be taxed on revenue (as it is essentially what IR35 is) and eventually cease to trade to make more space for companies like Infosys.
If HMRC had to take the GOV offenders to court? how would that work? particularly the DoJ?
it's just one of my random thoughts.