Several departments within the UK government collectively owe £263 million in fines due to mistakes made when implementing IR35 tax rules.
The government departments hit with the multi-million-pound tax bill include the Ministry of Justice, HM Courts, Tribunal Service, Home Office, and Defra. In addition to these bodies, other departments were issued penalties for not implementing IR35 correctly, such as the MoJ’s £15 million fine.
The huge fine was first published in the Public Accounts Committee review of IR35 reform, which heavily criticised how the government handled the tax reform.
While £263 million is a massive cost, the fines should serve as a warning to private energy firms to give compliance top priority.
What triggered the I35 tax disaster?
First published to the public sector in 2017, IR35 made organisations responsible for assessing the status of their contractors to determine if the service of a contract worker reflected self-employment or employment arrangement; a liability transferred to specific third parties in the supply chain.
According to experts, the government departments misunderstood the HMRC’s tool and, as a result, miscalculated how much they owed under the new I35 tax reforms.
These incorrect assessments lead to inaccurate compliance management practices, forcing public organisations to pay back hundreds of millions owed in tax.
Can private energy firms learn from this disaster?
While it is surprising to note how the HMRC and government could not implement their own tax reforms correctly, it serves as a warning to private energy firms.
In April 2021, IR35 was extended to the private sector with a one-year “soft landing” period for organisations to incorporate the ruling into their own energy compliance strategy.
This grace period expired in April of this year, meaning that private firms that did not implement IR35 or misunderstood the rules, could see fines at the same level as the public sector departments recently suffered.
However, while departments such as the Ministry of Justice can bear the cost, the same cannot be said about the private sector, for they have more to lose from paying such a hefty fine.
The main lesson to learn from this calamity is to take extra steps to ensure that IR35 is perfectly understood with no room for ambiguity and misrepresentation. An automated compliance platform can assess the tax rules in greater detail and how they relate to internal operations.