HMCTS discloses £12.5m HMRC tax bill over IR35 status contractor assessment errors

HM Courts and Tribunals Service (HMCTS) has declared a £12.5m loss in its 2020-21 accounts, related to mistaken assessments of the tax status of off-payroll employees.

The payment was disclosed in the service’s annual report, published in July 2021. It follows similar payments by the Department for Work and Pensions (£87.9m)  and the Home Office (£33.5m), reported on previously in detail by Computer Weekly.

In the HMCTS’s case, use of HM Revenue & Customs’ Check Employment Status Tool (CEST) might lie at the root of its errors, at least according to Dave Chaplin, founder and CEO of contractor-focused tax compliance specialist IR35 Shield.

Chaplin said: “HMRC’s CEST tool is failing fast and now we are hearing of yet one more government department, HM Courts and Tribunals Service, hit with a high tax bill to the tune of £12m because it has relied on CEST to assess its contracting workforce. One of CEST’s major flaws has been its over-reliance on substitution, which any defence expert knows is folly. Over the last few years, 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.”

(Substitution refers to the right of a contractor to provide a suitably qualified individual to deliver a service in their place).

Chaplin added: “My advice to anyone who has used CEST is to revisit your 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.

“Moreover, it is crucial that once you hire a worker on an ‘outside IR35’ basis that you continue to monitor the status throughout the engagement. Regular checking and gathering contemporaneous evidence are crucial in forming a pre-emptive defence. Poor assessment decisions left alone, without any evidence to back them up, can prove costly, as we are seeing with these recent governmental departments.”

The HMCTS annual report says that during the financial year 2020-21, it reviewed all off-payroll engagements using “HMRC’s guidance and online status indicator”, and it notes: “In 2020-21, there were two losses over £300,000 – [including] £12.5 million payable to HMRC in relation to IR35 liabilities arising from incorrect assessments of the employment status of workers. In 2019, HMRC challenged the MoJ [Ministry of Justice] to revisit employment status determinations 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 and quantifies the contingent liability disclosed in the 2019-20 Annual Report and Accounts. As the department could have avoided these tax and NI payments if a different determination had originally been made, the liabilities are classified as fruitless.”

The second loss, of £18.35m, pertains to the non-reusability by the Crown Prosecution Service of the functionality of a system that was originally designed as a pilot for a case management system for joint use by the CPS and HMCTS.