Government department faced an ‘eye-watering’ tax bill over ‘historic’ IR35 status determinations
It has emerged that the Department for Work and Pensions (DWP) was handed an enormous tax bill after a review of its IR35 compliance revealed it had carried out incorrect IR35 determinations.
The DWP’s tax payment came to light after the government department published its most recent set of accounts, which detailed overheads for the 2020/21 financial year.
According to Computer Weekly, a payment of £87.9 million was made to HMRC after it discovered “historic errors.”
Errors came after IR35 reform in public sector
The document confirmed that these mistakes were made after changes to the IR35 rules came into effect in the public sector in April 2017.
The reform – a similar version of which is now in force in the private sector – meant that public sector organisations such as the DWP became responsible for determining the IR35 status of contractors.
HMRC launched its investigation into the DWP’s handling of IR35 in March 2020. The document stated: “The result [of the HMRC review] was agreement on historic errors and acceptance by DWP of a liability for missing tax/ National Insurance plus interest for the financial years 2017-18 (£21.1 million), 2018-19 (£36.7 million), and 2019-20 (£29.7 million).”
The DWP also accepted a liability of £400,000 for errors made in the 2020-21 financial year.
CEST tool used to inform IR35 determinations
The report added: “This payment [of £89.7 million] relates to arrears of tax due and the interest on those arrears; the department has not paid any penalties for non-compliance.”
The DWP engaged 1,025 contractors, who were paid at least £245 a day for their services, in 2020-21. Of these, 35 had their IR35 status changed due to what they call a “consistency review.”
It also confirmed that the department had used HMRC’s Check Employment for Status Test (CEST) tool to make these IR35 determinations.
In response to the news, Andy Chamberlain, Director of Policy at IR35-lobbying body, IPSE, said: “The fact that even a major government department is struggling shows just how complex the IR35 rules are: and if they cannot comply with them, how are private companies across the UK meant to?
Unsurprising that firms make risk-averse decisions
“This is also seriously concerning because the DWP used the CEST tool – which for a long time we have argued is fundamentally flawed – and it led to them being hit with an £87.9 million tax bill. The CEST tool clearly cannot be relied on.
“We are left in a situation where businesses across the country are being asked to navigate the enormously complex issue of IR35 for each of their contractor engagements. It is not surprising they are taking risk-averse approaches and either forcing their contractors to work through umbrella companies or scrapping them altogether. But this response is devastating the sector. Government must step in and clear up this mess now.”
Seb Maley, Qdos CEO, echoed similar concerns over the use of the CEST tool. He said: “[…] 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.
“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. Even so, 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.”