IR35 Embarrassment for Goc

It looks like even the government messes things up when it comes to tax!

The Home Office and Department of Work and Pensions (DWP) has recently admitted they owe over £100M in back taxes for inaccurate application of the IR35 rules to their own contractors.

The DWP first made the admission in its 2020-2021 annual report, stating it had used HMRC’s Check Employment Status Tool to assess the correct tax treatment for its off-payroll workers.

It also owes the tax department £88M for historic errors from 2017-2021.

The Home Office later published its own annual report, quietly admitting a similar story of having been “careless” with assessments of its contractors’ employment and tax status between the same years.

They were penalised £4M, with a bill of £29.5M for incorrect assessments and interest.

Despite these repeated errors, the Home Office might not have to pay any of these if it meets several obligations within a 3 month period.

The obligations include:

A 100% assurance check on out of scope determinations
Improved governance on the use of contract labour
Stronger monitoring of IR35 compliance in future contracts
Better training of hiring managers

According to the Home Office’s report, it expects they will meet these conditions.

There has been ongoing distrust of the IR35 reforms and the Check Employment Status Tool, with lobbying to delay or reverse the rules when they were first brought in during the covid-19 pandemic. These concerns have now been elevated even further with a department of the government itself making errors and encountering issues.

The government’s inability to correctly follow the legislation provides ample evidence that it is overly complex or difficult to understand, and explains the struggles many organisations and businesses have when trying to assess whether a freelance contractor is genuinely self-employed.

People have also raised questions on how issuing a fine to a department of the government from another will help improve the efficiency of the services they are providing, or strengthen the public sector.

Use of the online tool will likely be highly scrutinised by business owners now, and experts suggest you thoroughly consider each individual circumstance yourself rather than solely lying on free software such as the Check Employment Status Tool.

Your payroll software also needs to be ready for IR35 too. Software such as BrightPay will automatically disable certain features, such as student loans, postgraduate loans, directorship, and annual leave entitlements.