HMRC issues penalty to Home Office over “careless” application of IR35 rules

The Home Office has been hit with a total of £33.5m of tax charges and penalties after an investigation by Her Majesty’s Revenue & Customs revealed that it had failed to implement the IR35 tax avoidance reforms properly.

Our London Tax Solicitors and Barristers have vast experience of tax laws and first hand commercial, litigation and advocacy experience. We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.

Careless Application of IR35 guidance

The Home Office’s annual report and accounts show that the implementation of the IR35 reforms was under review by HMRC in 2018. This led to several instances where the employment status of contractors was incorrectly assessed. Since April 2017, the Home Office and other public sector organisations have been responsible for deciding whether contractors should be taxed the same way as employees. The Home Office had 216 off-payroll workers who were earning at least £245 a day as of March 2021. Some of them had their status changed following a review. To which the Home Office’s £4 million charges was suspended to give it time to improve its compliance procedures.

The conditions set out by the Home Office for the establishment of a new contract include a requirement that the company has a 100% assurance check on all future out-of-scope decisions.The Home Office has identified and corrected the errors made by HMRC regarding the number of tax credits claimed by individuals.

The Home Office has been working with HMRC to resolve the issue and suspended the penalty imposed on it. The Home Office has admitted that it made errors in assessing the IR35 status of contractors. The Home Office has revealed that it made several errors in its IR35 assessment, and as a result, it has paid almost £9 million in unpaid tax to HMRC.

What is IR35?

HMRC introduced IR35 in 1999. The intention was to tackle “disguised employment” and prevent individuals working in a manner which was effectively the same as employees, but under the guise of limited companies. Companies engage contractors through an intermediary, often a personal services company. These self-employed individuals do not have to pay national insurance and and benefit from lower income tax.

HMRC claim that currently only 1 in 10 contractors, who should be paying these taxes are doing so and that these changes will bring in an additional £3.1bn in additional tax revenue between 2020 and 2024.

Do the IR35 rules affect my company?

Companies will not have to comply with the new IR35 legislation if they satisfy two or more of the following criteria:

(a) an annual turnover of not more than 10.2 million;

(b) balance sheet total of not more than 5.1 million; and

(c) number of employees of not more than 50.

How do I appeal a tax penalty?

If a taxpayer disagrees with HMRC, the taxpayer has the following options:

Stage 1: Request an HMRC review: A taxpayer can appeal in writing within 30 days of HMRC’s notice of their decision. HMRC can offer an internal review of the disputed decision (or the taxpayer can request this procedure at any time). The review is an entirely internal procedure completed not by the original HMRC decision-maker but by a different HMRC officer.

Stage 2: Appeal to the Tax Tribunal: A taxpayer can appeal to the First-Tier Tax Tribunal if the taxpayer cannot agree with their position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if a taxpayer does not agree with the decision. There are strict time limits for appealing to the Tax Tribunal and you should seek legal advice as soon as possible.

What can we do for you?

Our expert tax litigation team can:

• assess the employment status of your current contractor workforce and produce a status determination statement for each contractor as to whether they fell under IR35
• review your contractual terms to ensure the business has all the protection required
• assist with drafting communications with contractors and their line managers
• assist with liaising with HMRC where necessary

Expert London Tax Investigation Lawyers

If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.

Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.