HMRC has issued more IR35 tax penalties to the Ministry of Justice (MoJ) and the Department for Environment, Food and Rural Affairs (Defra). These bodies have been issued with tax bills totalling just over £120million for IR35 non-compliance.
As shown by the 2020-2021 annual reports and accounts for the MoJ, HMRC found that incorrect IR35 determinations were made by the department.
It stated the MoJ was liable for breaking the regulations and that it owed £72.1million to HMRC. Additionally, in its own annual reports and accounts, Defra was found by HMRC to owe £48million in liabilities for giving false IR35 determinations.
Andy Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed (IPSE), commented on these figures.
He said: “The fact that two major Government departments have run into trouble with their IR35 compliance shows just how complicated and confusing the regulations are.
“Even with guidance, support and training from HMRC, the MoJ and Defra have not made accurate status determinations. For private sector organisations that aren’t as connected to HMRC will almost certainly find it equally challenging.
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“The revelations that these huge tax bills are owed prompt a further question: has tax already been paid on these engagements? If it has, then HMRC is in danger of collecting too much tax, which is against its own principles. IPSE is calling for an offset mechanism to be introduced to ensure that double taxation can not occur.”
The news of these penalties may not be surprising to those affected by IR35 changes or who have been following the developments on the legislation. In late July, the DWP was issued with a £87.9million tax bill for incorrectly determining the IR35 status of contractors since 2017.
Following this, the Home Office was also issued with a £33.5million tax penalty for “careless” IR35 failings.
More recently, in late August, the HM Courts & Tribunal Service was handed a £12.5million tax bill by HMRC due to mistakes made when determining the IR35 status of contractors.
A Ministry of Justice spokesperson commented on the tax bill at the time: “Strict checks and extra controls have been introduced to ensure that tax rules are applied correctly.”
As more penalties came to light, a number of experts predicted other public bodies would also be issued with fines.
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Public bodies are not the only organisations to struggle with IR35 changes. Recent research by Brookson Legal showed UK businesses using contractors and freelancers have faced significant cost increases since IR35 rules were changed in April.
More than three-quarters of firms (87 percent) that use contractors have been forced to increase rates to attract talent since April 2021, with three-quarters (75 percent) forced to raise these rates by more than 10 percent. During an ongoing national skills shortage, as the economy grows post-pandemic, 77 percent are now finding hiring flexible workers to be challenging (48 percent) or very challenging (29 percent).
This “perfect storm” of issues also looks set to continue into 2022, as 90 percent of these companies plan to extend their use of contractors over the next 18 months to support business growth.
Brookson Legal noted while fear of HMRC fines was initially thought to be driving business behaviour over IR35, of the businesses surveyed, however, commercial risks such as contractor costs (53 percent), talent attraction (42 percent) and project delays (42 percent) have been identified as higher risks of a bad IR35 solution than unforeseen tax bills (31 percent).
Self-employed workers were hit particularly hard in 2021, through a combination of IR35 changes and the impact of the pandemic. While further misery loomed with the Omicron variant, Rishi Sunak took steps today to ease some of these worries.
Today, the Government announced a new £1billion support package for the leisure and hospitality industry, two sectors reliant on a flexible workforce.
Alan Thomas, UK CEO at Simply Business, commented on what this support will mean for small businesses and the self-employed.
He said: “Small businesses in the leisure and hospitality sector will be breathing a sigh of relief following Rishi Sunak’s announcement of a £1billion support package. Owners in these industries reported a 60 percent drop in trade in December – usually their busiest month – and the grants will help to offset the effects of rising Omicron cases and reduced trade.
“While this latest financial package will provide a lifeline, it’s vital that support doesn’t end here. More than half of all small businesses say they live in fear of future lockdowns, while one in five owners say their business won’t survive 2022 without a strong December.
“From our own study we know small retail, hospitality and leisure businesses have been disproportionately affected by Covid-19 – losing a staggering £40,000 each on average due to the pandemic. This is almost double the £22,000 average loss reported across all independent businesses.
“Small businesses are the backbone of our communities and economy, accounting for a third of all employment and contributing trillions of pounds a year in turnover – quite simply we all need them to bounce back. It’s crucial that the Government support the self-employed through this latest period of uncertainty.”