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DWP handed £88m tax bill over incorrect IR35 determinations

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.”

By Contractor Weekly

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12 thoughts on “DWP handed £88m tax bill over incorrect IR35 determinations”

  1. Gary Andrews

    Joke tax rules, joke government, joke country.
    This is what happens when cousins marry.

  2. john

    so HMRC screw up yet again and who will pay the 88m, us the tax payers, the whole guv process is a total joke, they can just waste money on projects that work against the people not for the people and are always in a win win situation whatever they do, this guv and the civil departments all need to be removed and be replaced with people that care who understand the value of the hard work and struggle that day to day people perform to pay the blood suckers

  3. Adrian

    There is no surprise here, sadly I’d love to blame the Tory government, but this fiasco is create by the pen pushing civil servants that have been around for years across many Governments. I’m sure they have seen “contract staff” who earn fortunes, in their mind, as being an easy target to wrestle more tax from. Inside IR35 just means you can longer save money to cover you for when you are out of work, so all the risk with no reward.

    • Gary Andrews

      I hate to break it to you but the civil service are there to enact government policy, like IR35 for instance.

      A particularly corrupt government might furnish the upper ranks with their own stooges and bully independent (experienced & competent) civil servants out.

  4. Andrew Harrison

    As usual this doesn’t seem like the whole story. Presumably there are now a whole load of contractors out there who’s tax has now been paid at source by the DWP. So they will have paid their tax (on an outside IR35 basis), so HMRC will have collected tax twice. The sensible thing would be for the tax refunds of the contrators taxes to be paid to the DWP, it would seem rather generous to refund the contractors who would then have been paid gross. It is obviously unacceptable for HMRC to keep both lots of tax.

    • Soprano

      The convenient aspect from all this to HMRC is the DWP is just another branch of the government – so it’s money moving from one hands of the gubmint to another. Hence, there is no political or financial will to challenge what would potentially end up being another lost HMRC case…

      You’re right though that they should be deducting the equivalent of the contractors’ tax payments from the total bill. I’d imagine that they do this as it’d be awfully bizarre and unfair if not.

  5. Onlooker

    IR35 is a wrong idea. Contractors should be allowed to work independently. If HMRC is concerned about tax stricture of LTD companies, then that could have been handled in a different way , perhaps with new policies. But , right now is a mess . So many layers of bureaucracy, and it’s costing money to government too.

    • Soprano

      It’s stupid on multiple levels. The key one being that no hirer would pay a permie the same as they do a contractor for the same position. There is the so-called freelancer premium. That £245 would not stay the same as a permie salary, hence the tax take (any differences are almost entirely attributable to employer’s NI now – recommend Dave Chaplin’s articles on this) will not go up as they wrongly assume it will. HMRC refuse to acknowledge this and it scuppers their rather shoddy calculations.

      They add all this admin overhead based on arbitrary, outdated laws on how “employment” looks (granted, at least they would usually result in the correct outcome if taken to court – many contractors should be “outside” as they’re not the same as employees, particularly due to lack of MoO) and then won’t even stick to their own, flawed tool used to perform these ridiculous assessments. IMO they just don’t want contractors about and they’re hoping most clients take the easy route of banning limiteds and putting them through PAYE.

  6. XY

    When the changes were floated regarding who makes the determination and foots the bill, HMRC stated that anyone using their CEST tool would not have anything to worry about.

    Yet here we are, a company which did just that are seeing demands for a massive amount of money.

    Note: there seems to be no suggestion that they used the tool incorrectly.

  7. XY

    Oh and – they promised that they would sort out the flaws in CEST to bring it in line with case law and the weight given to factors such as MOO.

    They’ve never done that either.

  8. Matt Johnson

    Everyone said this at the time, IR35 is supposed to save the government money but it was very clear at the time that it would end up costing them more. This is what happens when big consultancies (with their own agendas) are involved with creating central government policy. The government is literally outsourcing its thinking.

  9. GT

    There has to be a better way to ensure that contractors / agencies / clients know the position they are in.
    Total incompetence from the civil servants in HMT and HMRC who came up with this hair brained scheme.
    I could be totally wrong and they intended that the whole flexible labour market is wrecked. In which case, excellent job.
    Just wish we had a scheme called HM35 that made the civil service pensions as indeterminate.

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