What can we learn from public sector IR35 tax bills?

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What can we learn from public sector IR35 tax bills?
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A series of high-profile tax payments from government departments this summer has highlighted that the transition to IR35 compliance is far from over for the public sector, despite new responsibilities for managing off-payroll contractors being introduced back in 2017.

The eye-watering cumulative sums included the annual financial reports of the Department for Work and Pensions (£87.9m), Home Office (£33.5m) and HM Courts & Tribunal Service (£12.5m), which serve as a stark reminder to the private sector that although HM Revenue & Customs is still in the soft launch phase for the news rules, liabilities for non-compliance can still be building up. 

For those of us who have been providing advice on the off-payroll working rules since they were first introduced, it is frustrating to see many private sector businesses repeating the same mistakes. So, what can we learn from the public sector four years on?

Firstly, the government’s Check Employment Status for Tax tool, or in fact any automated tool, cannot be relied on solely to satisfy HMRC’s guidelines. We have seen many businesses approach CEST as a catch-all solution in the first quarter of the year, but it is clear from these reports that relying on CEST alone does not demonstrate "reasonable care" as outlined in HMRC’s guidelines.

For those of us who have been providing advice on the off-payroll working rules since they were first introduced, it is frustrating to see many private sector businesses repeating the same mistakes

Nor does using CEST mitigate for the hirer being liable for any mistakes that result in unpaid tax and national insurance contributions or fines. The HMCTS annual report explicitly states that the £12.5m deduction was for "incorrect assessments of the employment status of workers".

These tools are only as good as the information provided and do not by themselves guarantee IR35 compliance. In fact, the latest CEST data shows 20 per cent of its determinations are in a grey area, meaning a more nuanced, in other words person-led, exploration is needed. 

HMRC’s guidelines are clear that failing to input information properly, failing to take account of all relevant evidence, or relying on untrained staff to make assessments all demonstrate lack of reasonable care.

Nearly six months into the new legislation, now is a sensible time to review the processes in place around use of the tool, the confidence of the people using it and to conduct a sample audit to double-check work done to date.

An ongoing task

The second lesson is that management of the new IR35 responsibility is an ongoing task. Working practices frequently change, so contractor statuses need to be reviewed regularly. HMRC’s guidelines clearly state that a new assessment must be made "if there are material changes to a worker’s terms and conditions, or working practices". 

Once again, an automated tool is not a sufficient solution for this. Hiring managers and others in the business need to understand IR35, be able to recognise when a contract has changed and reconsider IR35 status at that point. This can be supplemented by sample audits at regular intervals and ongoing training and awareness of relevant staff. Just like any risk management issue, there needs to be a reasonable process to ensure you are applying the rules adequately. 

Finally, it is better to review short-term IR35 solutions that were put in place to meet the April 6 deadline now than to realise that they are not fit for your business further down the line.

The public sector saw a similar rush of initial short-term compliance solutions to be ready for IR35, but many organisations then failed to update their policies for business as usual. As financial services businesses now change their working practices and businesses restructure for growth post-pandemic, contractor management solutions need to evolve too. 

A number of high-profile major companies took the approach of having a blanket ban on contractors through the transition period, and some may now approach contracting with reticence.

However, while taking steps to avoid the tax liability risk of non-compliance, this approach presents an operational risk from delays to critical projects due to loss of or inability to attract resource – an issue experienced by many major public sector organisations in the wake of the 2017 rule change. 

Although it would be hard to read this in the annual accounts from Whitehall, pressure to recruit no matter what can easily lead to corner-cutting that exposes your business to the very risk you were seeking to avoid.  

Businesses that seek out a reputable and qualified specialist to iron out any remaining kinks in their IR35 strategy will have confidence that they have met HMRC's definition of reasonable care while gaining an advantage in a competitive labour market.

By acting properly now and building resilient systems for the long term, businesses can minimise tax and operational risk as well as maximise their ability to retain and attract contractor talent as the economy picks up again.

Recent breaches by public sector organisations have resulted in a boost for the Treasury’s coffers. If advice businesses proactively work with their clients now, the wins can be transferred. 

Matt Fryer is head of legal services at Brookson Legal