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NHS handed £4.3m IR35 bill despite using CEST

HMRC is demanding millions in unpaid tax, interest and penalties from the ​NHS

The NHS has been hit with a £4.3million tax bill after HMRC decided it had set its contractors’ IR35 status incorrectly, even though the organisation used the taxman’s very own IR35 tool, CEST, when doing so. 

NHS Digital announced in its Annual Report and Accounts earlier this week that despite having used “the toolkit supplied by HMRC” to determine IR35, the tax office is under the impression contractors engaged between 1st April 2017 and 31st December 2018 had their tax status assessed inaccurately. 

As a result, HMRC is demanding millions in unpaid tax, interest and penalties from the national healthcare service.

NHS Digital made “individual” IR35 assessments 

When IR35 reform was introduced to the public sector in April 2017, The NHS faced criticism in announcing its intention to blanket contractors inside the legislation. However, in this scenario, NHS Digital explained in its published accounts that it “undertook a considered assessment of the status for each individual contractor which we believed met the HMRC requirements.”

Despite conducting case-by-case IR35 determinations, the numerous flaws and inaccuracies of CEST - which NHS Digital used to assess status - meant that these contractors, in the eyes of HMRC, were wrongly placed outside IR35.  

Above all else, this should serve as a reminder to businesses that to rely on CEST poses a considerable risk, even if they are assessing the status of each contractor individually.

Will HMRC stand by CEST?

Only when it suits them. The tax office has said it will stand by decisions based on CEST but only when the information inputted into the tool is absolutely correct. In the case of NHS Digital, the fact that HMRC expects a £4.3 million payment indicates that the taxman believes the wrong information was submitted.

However, given CEST consists of 16 limited questions which leave very little opportunity for a business to include specific details that a contractor’s status could hinge on, companies administering IR35 using only CEST will not have conducted an in-depth review of the working engagement.

As is the case here, it looks to have cost NHS Digital a staggering £4.3million.

Decisions backed by IR35 expert not scrutinised

NHS Digital stated that in January 2019 it changed the way it administers the IR35 rules. Now, the organisation makes an initial assessment internally, with contractors considered to be outside the scope of the IR35 legislation then reassessed by an external provider. It’s important to note that HMRC is not investigating these decisions which, above all else, demonstrates the value of expert and objective IR35 advice.

Contractors key to NHS Digital projects 

NHS Digital explained that contractors are crucial to the success of its projects, mentioning that many “programmes require specialist input on a temporary basis and it is not always cost-effective to permanently recruit such skills.” 

This is also the case for other public sector bodies and the private sector, which also benefits from skills, flexibility and savings of compliantly engaging contractors outside IR35. Given genuine contractors are understandably reluctant to move onto a client’s payroll, businesses that want to retain these benefits and protect their own liability must make sure they are able to accurately determine IR35 status before reform arrives on 6th April 2020.

Importance of IR35 insurance emphasised

The money NHS Digital is under instruction to pay to HMRC is another reminder of the sums that can be involved in IR35 cases. When reform is enforced next year, private sector firms - like public sector bodies - would be wise to protect themselves with IR35 insurance.

Without this in place, whichever party carries the liability will have to pay out of their own pocket, should HMRC find them guilty of non-compliance. 

Qdos is currently helping more than 100 businesses prepare for and manage IR35 reform. To learn more about our insurance-backed IR35 assessments, please contact us on info@qdoscommercialservices.com or 0116 478 3390.

By:Benedict Smith

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