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HMRC fines other government departments Isn't that just HMrc fining themselves?

HMRC effectively fine themselves in IR35 crackdown

Our wonderful shadowy army of tax officials have truly excelled themselves this time by issuing over £300 million in IR35 penalties to other government departments, thus effectively fining themselves.

This came to light when a government body, UK Research & Innovation (UKRI), disclosed in its annual report for 2021/22, that it had been fined £36m by HMRC for a breach of off-payroll working rules by misclassifying the IR35 status of contractors working for it.

UKRI is a non-governmental body but is paid for and comes under the auspices of, the Department for Science, Innovation and Technology (DSIT) and as its name would suggest, it has to use a wide range of independent experts on many of the projects it is involved in.

HMRC fines UK Government: It’s not just UKRI in trouble

Reforms to how contractors, sole traders and other non-permanent staff are paid, were brought in by HMRC in 2017, but most of the public sector has struggled to understand and comply with the new rules. In the last tax year alone, a string of government departments and associated quangos have been fined by HMRC, including HM Courts & Tribunals Service £13m, Department of Work and Pensions (£88m) and the Home Office (£34m).

IR35 expert Dave Chaplin of IR35shield.co.uk said he had spoken to the Department for Science, Innovation and Technology regarding UKRI’s penalty and was told that the matter was a mixture of general status issues concerning sole traders and other IR35 complexities which its officials had struggled to understand.

HMRC fines UK Government: Knock-on effect

UKRI has said it will be contesting the fine with HMRC, as these sole trader tax issues go back six years. If these specialist contractors are reclassified as PAYE workers because their status was wrong, they may even have viable claims for holiday pay going back years, adding further millions to UKRI’s financial woes.

Dave Chaplin commented, “If UKRI wants to move to payroll-only, which it could do, then it could just make a policy change going forwards. The extra tax UKRI will have to pay to hire the workers will just circulate back to the Treasury anyway. The current mess seems entirely unnecessary and avoidable.”

HMRC fines UK Government: Big numbers

The figures published thusfar, show the tax bills issued to public sector departments for non-compliance with payroll legislation have now passed £300m. The number is “astonishing”’ said Seb Maley, CEO of IR35 specialist Qdos. “These bodies should be leading by example, showing private sector businesses how to successfully manage the off-payroll working rules,” he said. “I’m not sure what’s more worrying – the sheer size of this bill or the fact that it’s something we’ve come to expect in the public sector. And I can’t help but wonder who’s next.”

Whilst the data published so far, does not show details of why HMRC’s mounted these investigations into fellow Public Service bodies, why they are increasingly doing is however very interesting. As I am somewhat cynical as to HMRC’s motives on most things they do, it definitely appears to be a deliberate targeting of their own fellow departments, as they expect easy wins.

HMRC fines UK Government: Round and round in circles

The Public Accounts Committee (PAC) has also been highly critical of HMRC, stating that the seemingly high levels of non-compliance in central government reflected poor implementation by HMRC. In its 2022 IR35 report, the PAC recommended that HMRC develop “robust estimates” of non-compliance for the entire public sector and use the insights to reduce the compliance challenge.

One suggestion by the PAC was for HMRC to significantly improve its guidance and tools, especially the much-maligned Check Employment Status for Tax (CEST) system, which was brought in to enable both employers and subcontractors to check on their tax status.

Rebecca Seeley Harris Off-payroll & IR35 Expert and author of CEST Explained, said: “Although the government agreed with the PAC recommendations it disagreed with their conclusions. HMRC said that they had undertaken an extensive programme of customer education and support when implementing CEST and claimed to have provided additional support. So, how come most government departments keep failing?”

Tax Accountant’s view

Ask any accountant about IR35 and he/she will tell that the rules are a nightmare, with too many left to the interpretation of the reader. It is no wonder that problems often emerge as the tangled web of rules are invariably too complex for anyone other than highly specialised experts to interpret.

In Government errors in implementing these complex rules, have been compounded by the issues of employment status and IR35 falling between different departments. Thus, without a specialist being employed to constantly monitor compliance, mistakes will inevitably be made.