Govt owes itself £263m in back taxes as Whitehall departments failed to comply with payroll rules

Due to a failure of Whitehall departments to comply with rules on off-payroll working, MPs have stated that the Government owes itself hundreds of millions of pounds in back taxes.

The Commons Public Accounts Committee said it was “not acceptable” that central government was paying out to cover tax owed for individuals who had been wrongly assessed as self-employed.

Government departments and agencies owed – or were expected to owe – HM Revenue and Customs (HMRC) £263m for 2020-21 due to the “incorrect administration” of the rules, the committee found.

IR35 rule

The IR35 rule was introduced in 2000 to prevent tax avoidance by “disguised employees” who do the same job as an employee but escape income tax and national insurance by providing services through an intermediary such as a personal services company.

Due to low levels of compliance, HMRC sought to tighten the rules – with the changes coming into effect in the public sector in April 2017.

However the committee said the “rushed” manner in which the new regulations were introduced meant some government departments struggled to implement them properly.

“Central government is spending hundreds of millions of pounds to cover tax owed for individuals wrongly assessed as self-employed.”

Commons Public Accounts Committee

“This is not acceptable considering government departments should be in a good place to understand the rules and communicate with HMRC.

“However, mistakes were likely as the reforms were rushed in by HMRC and public bodies were given little time to prepare.”

HMRC response

An HMRC spokesman said: “These reforms have succeeded in making the tax system fairer, with more people who work like employees paying tax like employees, levelling the playing field for everybody else and bringing in the tax that is due under the law.

“We delivered an extensive programme of education and support before the reforms took effect and we have continued to adapt our approach to improve compliance with the rules and support organisations to get things right.”