The Department for Work and Pensions (DWP) was left with a staggering tax bill of £87.9m for wrongly assessing the IR35 status of contractors, a Computer Weekly article has revealed.
Details of DWP’s non-compliance emerged in its annual accounts, which provide details of departmental spending during the 2020/21 financial year.
According to the report, the £87.9m tax payment made to HMRC followed an IR35 investigation in March 2020, after the tax office reviewed the department’s handling of IR35 reform in the public sector in 2017.
Following the introduction of these changes, all public sector bodies became responsible for determining the IR35 status of contractors. As part of the reform, the liability was transferred from the contractor to the fee-paying party in the supply chain.
In April 2021, similar changes arrived in the private sector and saw medium and large businesses tasked with assessing IR35 status.
The full details of this IR35 story are yet to emerge – and might not ever be revealed – but the sheer size of this tax bill is a firm reminder of the importance of making correct IR35 decisions.
£87.9m is the largest IR35 tax liability imposed on an organisation by HMRC (that we’re aware of), but rather than dissuade businesses from engaging contractors, it should be viewed as an incentive to prioritise compliance.
The amount was made up of missing Income Tax and National Insurance (plus interest) for 2017/18 (£21.1m), 2018/19 (£36.7m) and 2019/20 (£29.7m). In addition to this, DWP agreed to accept £400,000 in liability for non-compliance in 2020/21, which brought the total to £87.9m.
In 2020/21, it was reported that DWP engaged 1025 contractors, each of whom had a day-rate of at least £245. Of these, 35 were said to have had their IR35 status changed as part of a “consistency review.”
While HMRC often imposes financial penalties on organisations for failing to operate compliantly, in this situation the tax office agreed not to penalise the DWP.
As a government department, the DWP paying money to HMRC is very different to any other business handing over large sums to the tax office. But even so, the question has rightly been asked by a number of IR35 experts if HMRC would treat a non-government body with this much leniency, particularly given the extent of the non-compliance.
In the public sector, HMRC have the right to hand out financial penalties, while in the private sector following reform, the government have given businesses one year without this threat.
However, tax liabilities and interest payments still apply, which in many cases dwarf penalties.
The DWP report also stated that HMRC’s IR35 tool, Check Employment Status for Tax (CEST), was used to assess the status of contractors.
That a government department relied on HMRC’s own IR35 tool to provide answers which have been found to be incorrect casts even more doubt over this flawed technology.
This isn’t the first time a public sector organisation has paid the price for using CEST, though. In 2019 it came to light that NHS Digital had to pay £4.3m in tax for inaccurate IR35 decisions which were made based on answers provided by the tool.
But as our CEO, Seb Maley, explained to The Express, businesses are under no obligation to use CEST – and in fact, are even advised against it altogether.
“Here we have proof that using it can easily lead to mistakes and staggering financial consequences. But businesses aren’t required to use the tool and, as we can see here, there’s zero guarantee that HMRC will stand by answers it delivers.”
Qdos supports over 2,800 organisations with their IR35 compliance. To learn more about how we can help you manage IR35 reform, please email [email protected] or call 0116 478 3390.
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