Government tribunal service gets bill for wrong IR35 assessments

The HM Courts and Tribunal Service (HMCTS) is the latest government department to fall foul of HM Revenue & Customs Service’s IR35 legislation.

It has been hit with a £12.5m bill arising from incorrect assessments of the employment status of workers.

The bill reflects contracted workers misclassified via HMRC’s CEST [online Check Employment Status for Tax] tool between 2017 and 2020. Other government departments that have received bills in the millions of pounds because of contracted worker misclassification with the CEST tool are the Department of Work and Pensions (£87m) and the Home Office (£29m).

HMCTS had concluded that workers were operating outside the off-payroll working rules on the basis that the individual worker would be substituted by another worker at the worker’s choice without consultation with the department and without the department having any right of veto.

However, in its annual report of accounts 2020-21, HMCTS said that HMRC had “challenged the Ministry of Justice [HMCTS’ parent organisation] to revisit employment status for off-payroll workers engaged between 6 April 2017 and 5 April 2020, where we had previously concluded workers were operating outside of the off-payroll working rules. This liability has crystallised”.

The report goes on to say that the liabilities are classified as “fruitless” because “the department could have avoided these tax and NI [National Insurance] payments if a different determination had originally been made”.

HMCTS also said: “We applied the off-payroll rules with diligence and care, taking a considered assessment of the status of each contingent worker in the first instance, using HMRC’s online status determination tool.”

The CEST tool has been widely criticised for, among other points, what IR35 expert Dave Chaplin calls “its over-reliance on substitution, which any defence expert knows is folly”.

“Over the last few years,” Chaplin went on to say, “many industry experts have pointed out CEST’s failings to HMRC but those messages were ignored, and now we are witnessing the fallout and financial damage.”

Chaplin advised CEST users to revisit their determinations “and if they rely on a valid right to substitute then seek advice on the correct interpretation of the law. Also recheck the status with the assumption that the substitution clause is not valid, to make sure you have not also been badly exposed due to the flaw”.

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