UK Research & Innovation (UKRI), has recently revealed in its 2021-22 accounts that it misapplied the Off-Payroll Working rules in the period 06.04.17 – 05.04.22 which will cost them 36 million – taking the total amount owed from public sector tax bills related to the IR35 legislation to over £300m.
Considering the public sector reforms came into force in 2017, this high figure is significant. Here, we outline the issue, and how those assessing contractors’ IR35 status can protect themselves against risk.
Where did it go wrong for UKRI?
UKRI is sponsored by the UK Department of Science, Innovation and Technology, and supports the work of nine research councils. This includes the UK’s national innovation agency – Innovate UK – who is the one brought to light in this case.
Innovate UK was found to have engaged some contractors who should have been considered inside IR35 and subject to Income Tax and National Insurance Contributions, which has given rise to a £36 million tax bill.
The issue with IR35 in the public sector
The public sector should be at the forefront of the changes to IR35 – because they and HMRC are one and the same. They’re both government-funded, so in theory, they should have the best support available from another government department. Instead, the public sector has become a laughing stock in their execution of IR35 reforms – something we can all agree has been a failure.
In fact, many aren’t even surprised by these sizable tax bills given the sheer volume of money owed. What’s more, the public sector hasn’t pushed back on HMRC’s challenges, which isn’t the case for the private sector.
Whilst it hasn’t been revealed what method UKRI utilised in determining the status of its workforce, it maybe that HMRC’s CEST tool was used, as has been the case with many other government departments in a similar position owing tax. As CEST is not wholly trustworthy, in our opinion, it shouldn’t be used in isolation to determine IR35 status.
Meeting IR35 compliance requirements
As a private sector business, receiving a £36m backdated tax bill could be crippling, and could even cause liquidation. That’s why compliance with IR35 reforms is key. UKRI’s failure to determine their contractors’ status correctly may make others question how to do so successfully. But a £36m tax bill shouldn’t force private sector businesses to make knee-jerk reactions like banning contractors. Off-payroll rules can be managed compliantly.
Lack of trust in the CEST tool
It is easy to see why, in a recent whitepaper published by Kingsbridge Contractor Insurance, that the HMRC CEST tool continues to be viewed with scepticism. Half of the contractors surveyed expressed distrust in the tool, and 48% of end clients shared this sentiment, also saying that they don’t trust CEST.
While 34% of contractors and 37% recruiters said they would choose not to work with a client based on their decision to use the CEST tool. Moreover, 49% of cases determined by CEST were deemed outside IR35, raising more concerns about its effectiveness.
The importance of education and accurate determination
Andy Vessey ATT, Head of Tax at Kingsbridge said, “Broadly speaking, it’s indicative from the survey results that there isn’t absolute faith in a Status Determination Statement (SDS) produced by CEST, even though half of all end clients still opt to use it.
This disparity could be down to the fact that the tool is free to use, even though it could be costing them in lost talent, especially with some recruiters and contractors reporting that they may opt not to work with an end client who relies on CEST for these status determinations.”
To overcome the lingering risk-averse attitude among some end clients, investing in education around IR35 is crucial. By understanding the basic principles of employment status and the application of IR35, businesses can confidently engage with limited company contractors and reap the benefits of their skills.
Andy commented, “Whether it’s the end client, contractor, or recruiter I would recommend that they ensure their review involves a holistic approach to status determinations. It should ask varied, comprehensive and relevant questions about the contractual and working practices which, in turn, should give rise to a trustworthy status review.
There should also be opportunities to provide contextual notes and/or have the ability to talk directly to the IR35 specialist, to further explain your circumstances in order to produce an accurate and reliable SDS.”
The status review should provide a detailed report which outlines whether the contractor is inside or outside IR35 and the reasons behind that decision. Having a contract review in conjunction with an automated assessment will also show the strengths and weaknesses of a given contract. This can help you amend any potential issues in wording or arrangements provided they accurately reflect the working relationship between the parties.”
What else can you do?
Another important consideration, whether it’s the end client, recruiter, or contractor, is to insure the IR35 risk. As shown in this most recent case, HMRC investigations can be costly, lengthy and time consuming affairs. Insuring against the risk not only gives peace of mind, it adds to the IR35 defence armoury in the event of a HMRC enquiry.
The whitepaper revealed that 70% of end clients and 87% of recruiters reported that they had insured their tax, interest, legal costs, and penalties risk liabilities should HMRC investigate their business under the Off-Payroll Working Rules. A clear sign of some scepticism that surrounds the CEST tool.
Andy concluded, “Clearly, the reform caused a serious problem within the public sector. Some businesses within the private sector, understandably to a degree, have been adopting a much more risk-averse approach. But our whitepaper data also shows 77% of end clients believe contractors are ‘important to their business’, inferring that specialist skills are still needed for continued business development. Ultimately it will be those forward-thinking companies who are likely to stay ahead of the competition.”
