Home Office faces £33.5m penalty as HMRC condemns ‘careless’ IR35 failings – full details

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IR35 tax changes were implemented in April as medium to large businesses became responsible for setting the tax status of contractors they hired. This followed on from a similar update made in 2017, when public sector organisations were expected to do the same.

IR35 tax rules have proven to be controversial as many experts warned the complicated and costly changes would hamper the use of contractors.

The Government has been criticised for not making the rules clearer and today, it emerged HMRC has taken the state to task on this.

Computerweekly.com today reported the Home Office has been issued with a £33.5million tax bill over “careless” applications of IR35 tax rules.

The tax charge was issued after a review of the department’s IR35 compliance procedures by HMRC found the Home Office had been careless in its implementations of tax avoidance reforms.

HMRC detailed the Home Office had incorrectly assessed numerous contractors as working outside IR35 since April 2017.

As a result of this, tax bills of £29.5million are due to cover the income tax, national insurance contributions and interest costs that, HMRC claims, was lost through these errors.

HMRC went on to add an additional £4million penalty onto this bill due to HMRCs apparent carelessness.

However, the additional £4million charged was conditionally suspended for three months to allow the Home Office time to improve its internal procedures.

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On this, a Home Office spokesperson assured the inaccurate determinations were a “small administrative error” which is/was being worked on.

The spokesperson said: “HMRC has recognised that the Home Office made every effort to resolve this issue quickly and effectively and has suspended the penalty imposed while the cooperation is ongoing,”

Dave Chaplin, the CEO of compliance solution IR35 Shield, commented on this news: “The Home Office says it needs to ‘monitor compliance’ which reinforces what I have been saying for a long time – a single assessment is not enough, and firms need to be regularly checking status and gathering evidence to support their original status determinations.

“Certainty is what business needs to succeed. 

“If commercial contracts cannot be entered into with certainty, it destroys the fundamental fabric of a market economy.

“And, what we are now seeing is a consequence of the false promises that HMRC made to Parliament in the lead up to the roll out of the Off-Payroll legislation, and the uncertainty created by HMRC’s failed CEST tool.

“This is extremely serious and since April 2021 the situation has got worse and Parliament should not tolerate it.

“HMRC appears to have no comprehension of how destructive their reforms have been to both people’s lives and the economy. Questions need to be asked.”

Similar penalties were also recently levied on the DWP for apparent IR35 failings.

The DWP was issued with a £87.9million tax bill as a result of incorrectly determining the IR35 status of contractors it hired since 2017.

In response to its own bill, a DWP spokesperson said: “Last year HMRC concluded its review of off-payroll working implementation in DWP.

“DWP is committed to ensuring that the correct tax is paid and has taken steps, including working more closely with HMRC, to improve our processes.”

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