Her Majesty’s Courts & Tribunals Service is facing a £12.5 million bill after making the wrong IR35 assessments for its contracted staff.  

Following costly tax bills imposed on the Department of Work and Pensions as well as the Home Office, HM Courts and Tribunals Service is now the latest government body made to pay out millions of pounds due to failings linked to IR35.

Between April 2017 and April 2020, HM Courts and Tribunals Service was found to have made several incorrect determinations linked to IR35.

Specifically, the body classified workers as operating outside the IR35 off-payroll working rules – a determination which HMRC ultimately contested.

This error was thought to be brought about by the Check Employment Status for Tax (CEST) tool; an online tool which was intended to help determine a worker’s employment status for tax and National Insurance contributions purposes.

However, this tool has been criticised in the past for failing to accurately determine workers’ employment status, leaving around a fifth of people in the dark about whether or not they fall within the off-payroll working rules.

In April of this year, a long-standing amendment to IR35 rules was enacted, giving the company which is hiring the contractor’s services full responsibility over determining the employment status of the worker.

As such, the rules have changed so large and medium sized companies within the private sector are now expected to make this judgement.

However, organisations within the public sector have been subject to these rules since April 2017, explaining why many bodies within the public sector have been fined heavily.

Qdos CEO, Seb Maley, reacted to this hefty charge, arguing that the CEST tool is not fit for purpose:

The question ‘who next?’ springs to mind. This is the third government body to reveal that it has been stung by a multi-million pound IR35 tax liability. But given that HMRC’s fundamentally flawed IR35 tool, CEST, was used to decide the IR35 status of contract workers, I’m not in the least bit surprised that mistakes have been made.

Here we have proof yet again that the taxman’s very own IR35 tool threatens compliance rather than ensuring it. Businesses should avoid it altogether or at the very least get a second opinion on every answer it provides.

As a government body, the £12.5m in tax liability paid is effectively wooden dollars – money passing from one department to another. But it would be a different story for a private sector firm, and the sheer size of a tax bill like this could devastate a business.

The staggering tax payments made by public sector bodies recently highlight how important it is that businesses ensure IR35 compliance, which is clearly a priority for HMRC right now.