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DWP saddled with £87.9m IR35 bill

The government department for work and pensions pays for historic IR35 errors made using CEST tool

It has been revealed by Computer Weekly that the public sector Department for Work and Pensions (DWP) which engages a reported 1,025 limited company contractors in 2020/21, has accepted the liability for errors made in the IR35 determination of contractors spanning back to the introduction of IR35 reform in the public sector in 2017.

IR35 reform placed the responsibility and liability of determining employment status for tax (IR35 status) on the engagers and/or fee-payers of limited company contractors – in this case, the DWP. Such changes were also implemented in the private sector earlier this year.

The incorrect determinations have cost the department a staggering £87.9m as emerged in the DWP’s annual accounts which provide details of departmental spending.


Run-down of the costs

  • 2017-18- £21.2m
  • 2018-19- £36.7m
  • 2019-20- £29.7m
  • 2020-21 (so far)- £0.4m

The bill includes backdated tax and National Insurance, and interest on these amounts however no additional penalties have been imposed. Whilst the private sector have been granted a 12-month grace period for penalty charges, HMRC can impose sizeable penalties in the public sector.

As a government department, questions are raised around whether a non-government department would be treated with similar leniency. As Qdos CEO, Seb Maley, commented to The Express:

“While DWP’s tax bill is eye-watering, the fact that it’s a Government body means the financial blow will be less felt in this scenario.”


CEST strikes again

Whilst there is no specific information about the errors that were made by the DWP in their determination process, we do know that HMRC’s Check Employment Status for Tax (CEST) tool was used, demonstrating why engagers should think twice before relying on its results.

HMRC not standing by the determinations of CEST is not an isolated incident. Back in 2019 NHS Digital were also saddled with a tax bill of £4.3m despite having undertaken determinations through the tool.

For a more detailed breakdown of the shortcomings of HMRC’s very own CEST, see here.


What will the DWP do now?

The DWP has stated that they are going to be working more closely with HMRC to ensure the correct tax is paid and that their processes are improved.

Minor details of the improvements in the IR35 assessment procedures have been released by a spokesperson for the DWP. This includes the promise of “a substantial investment in terms of time, effort and resources to improve the departmental position regarding compliance with IR35 requirements”.


What does this mean for contractors?

Whilst DWP’s IR35 bill may raise concerns over organisations refraining from taking on more contractors, our CEO Seb Maley believes that this should not prove cause for concern:

“This isn’t a reason for other firms to stop engaging contractors. Having worked with dozens of public sector bodies since 2017, we have shown that with a robust, fair process and detailed audit trail, organisations can keep challenges like this at bay.

“This is another high profile IR35 story that involves millions of pounds. And as far as I’m concerned, HMRC have sent a clear signal of intent. Compliance in this area sits high on the tax office’s agenda and following reform to IR35, they are now in a position to approach businesses along with contractors.”

One thing that is reinforced here is that HMRC are willing and able to go after even those who have used CEST as proof of status. Whether it be end clients, or the contractors themselves retroactively.

Sign up to our monthly newsletter to keep up to date with relevant industry news and updates. Qdos are a leading provider of award-winning services, including IR35 insurance. For more information, please call 0116 262 0999 or email [email protected].

By:Alice Hickling

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