HS2 is just about the latest public sector entity to possess fallen foul of the IR35 rules, using its accounts confirming that it’s anticipating a goverment tax bill of 9.5m for failing woefully to measure the status of contractors provided to it by way of a alternative party
- Caroline Donnelly,Datacentre Editor
Published: 09 Aug 2022 10: 45
HS2, the general public body in charge of developing the UKs high-speed rail network, has reserve 9.5m to cover the expense of suspected non-compliance with the IR35 tax avoidance legislation, its public accounts confirm.
The organisation, that is classified being an executive non-departmental public body and sponsored by the Department for Transport, said its historic compliance with the IR35 rules may be the subject of a continuing review by HM Revenue & Customs (HMRC) that were only available in May 2022.
That work will confirm how much tax HS2 must pay to cover the expense of IR35 compliance failings made between April 2017 and November 2020, Computer Weekly has learned.
The organisation confirmed in its accounts that 9.5m has been reserve pre-emptively to cover any tax owed, this means a complete of 272.5m worth of IR35 compliance errors have been created by public sector organisations, with the biggest to-date being the 87.9m goverment tax bill the Department for Work and Pensions got landed with by HMRC.
The reworked IR35 Off-Payroll working rules, that arrived to effect for HS2 and all of those other public sector in April 2017, saw contractors cede control to the end-user organisations that engage them for determining how they must be taxed in line with the work they do and how it really is performed.
Contractors whose engagements are assessed to be within scope of the guidelines (referred to as inside IR35) are treated as employees for tax purposes, meaning they’re responsible for Pay As You Earn (PAYE) and National Insurance Contributions (NICs), but aren’t permitted receive workplace benefits.
Meanwhile, people who are determined to be out-of-scope of the guidelines are classified as working outside IR35.
The HS2 accounts cover the 12 months to 31 March 2022 and declare that an interior review, in conjunction with additional guidance from HMRC, revealed HS2 didn’t perform employment status determinations on several contractors since they were given by a third-party provider.
During 2020, internal checks and extra HMRC guidance highlighted some cases of workers who have been engaged through other suppliers that was not appropriately reviewed, the accounts stated.
Around liability has been identified via an internal overview of workers operating between April 2019 and March 2021 utilizing a calculation of PAYE and National Insurance that might be due on assumed earnings. This figure has been extrapolated back again to April 2017.
Computer Weekly understands the problem concerns a restricted amount of contractors HS2 used during this time period, who have been engaged by way of a alternative party on a contracted out services basis.
In this sort of setup, responsibility for determining the way the contractors ought to be taxed falls on the third-party supplier as opposed to the end-user organisation they find yourself doing work for.
Where you enter a contract for an authentic service or fully contracted out service, [the public sector body] will never be your client for the purposes of the off-payroll working rules. Instead, your client would be the company because they’re the person the task offers their services to, said HMRC within an August 2021 Employer Bulletin guidance document, warning of the pitfalls of contracted out working setups.
As detailed elsewhere for the reason that bulletin, contracted out services are tricky to define which can leave end-user organisations, such as for example HS2, exposed. Whether a contract is for a completely contracted out service is really a question of fact based on the commercial reality of the arrangements. Where there’s uncertainty concerning who the real client is, consideration ought to be given to the type of the relevant contracts and working practices.
In a statement to Computer Weekly, a spokesperson for HS2 said the organisation took action in 2020 to make sure it complies with the IR35 rules.HS2 takes our obligations to adhere to tax legislation extremely seriously and is dealing with HMRC on a compliance review to assess any historic tax liability. Since 2020, HS2 has implemented new processes to make sure we meet all liabilities beneath the Off Payroll Working Legislation.
Dave Chaplin, CEO of contractor tax compliance firm IR35 Shield, told Computer Weekly the case highlights why it really is so very important to end-hirers to accomplish due diligence if they have a consultancy providing contractors contained in their supply chain.
Firms which are engaging with consultancies should carefully examine their arrangements, and usually the answer is situated in the contract between them and the consultancy, he said.
Its essential that the hirer, in this situation HS2, conducts due-diligence to make sure that the consultancy offers wholly outsourced services, rather than labour.
If the consultancy is acting as an employment business, then your hirer may be the client for off-payroll working purposes and in charge of classifying the contractors.If your client HS2 in cases like this have not issued determinations to the consultancy and workers, then additionally it is the fee-payer and responsible for the tax.
At IR35 Shield, we’ve seen many genuine consultancy arrangements used, however the legacy paperwork is more comparable to one of a company providing labour, which may be fatal within an IR35 investigation.
The annual report states that once HMRCs compliance review is completed, HS2 will undoubtedly be investigating when there is a price which can be recovered from its suppliers to offset the quantity of tax it must pay HMRC but Chaplin isn’t convinced which will work.
For HS2, they’ll be saddled with the complete goverment tax bill, and the contractors earnings will now be net of tax, because of the flaws in the legislation. The entire effect is that the Treasury will eventually lose money, he said.
As detailed in its 2020-2021 accounts, which it filed on 5 August 2022, HS2 engaged 294 contractors through the 1 April 2021 to 31 March 2022 period which were paid a lot more than 245 each day, and 20 of the individuals were classified as working outside IR35.
The report states that HS2 used HMRCs online Check Employment Status for Tax (CEST) tool in conjunction with the tax collection agencys guidance to choose the way the contractors it engages ought to be taxed.
For a clearly project-based initiative, the amount of contractors classified to be inside IR35 is curious, continued Chaplin: Unlike HMRCs assertions through the consultation phase [for CEST] that roughly a third of contractors will be inside IR35, in this situation HS2 has classified 93.2% of these as deemed employees. This is apparently a significantly lot.
Additionally it is worth noting, he added, that the deputy chair of HS2 is Jon Thompson, who was simply in charge of overseeing the roll-out of the IR35 reforms during his time as CEO of HMRC.
If Jon cant get IR35 right, who is able to? he said. Its is yet another shining example to aid calls, plus a growing plethora of evidence to ditch a legislation that’s having a hugely damaging effect on contractors, the firms that hire them and the economy all together. And the actual fact HS2 is yet another public sector organisation that’s facing a goverment tax bill in an extended type of others just proves the legislation is unworkable.
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