By: Emma Tait-Barber

DWP pays £87.9m to HMRC following IR35 dispute

It’s not every day that you hear about an organisation being made to pay £87.9m in missing tax.

And it’s unheard of that failure to abide by the IR35 legislation is the cause of a tax bill of this enormity.

But that’s exactly what emerged in late July. The Department for Work and Pensions had no choice but to pay HMRC £87.9m in the 2020/21 financial year, after it was found that this public sector body had made ‘historic errors’ relating to IR35.

This story, which was broken by Computer Weekly and has also caught the attention of national media, was published soon after the DWP revealed details of the payments made to HMRC in its annual accounts for 2020/21.

The document states that, following an IR35 review opened in March 2020 by HMRC, the tax authority concluded that this government department had been wrongly engaging contractors outside IR35 for a number of years.

According to the DWP’s annual report, these mistakes date back as far as 2017, when all public sector organisations became responsible for assessing the IR35 status of contractors. As a result, the DWP revealed they had to pay outstanding tax liabilities plus interest for their non-compliance.

This amount was broken down as follows:

While the specifics of the IR35 legislation’s latest saga haven’t been made public - and by this we mean the factors that led to incorrect IR35 assessments - there are some important details that have come to light.

We’ll take a look at these now.

CEST used by DWP to assess IR35 status

That the DWP used HMRC’s Check Employment Status for Tax (CEST) tool to assess the status of contractors has not gone unnoticed.

In its 4 years of operation, CEST has faced regular criticism from experts, who have raised concerns about its ability to recognise if a contractor truly belongs inside or outside IR35.

A government body being hit with a tax bill of this magnitude will not have done anything to convince sceptics that CEST can be counted on.

DWP not the first, nor was it the last

A number of IR35 commentators were also quick to point out that HMRC pursuing a government department for IR35-related tax payments has happened before.

In 2019, NHS Digital was slapped with a £4.3m bill after the tax office decided that this department of the National Healthcare Service had made incorrect IR35 assessments. Incidentally, like the DWP, NHS Digital used CEST to make IR35 determinations.

But there’s more. Less than a week after the DWP story broke, fresh reports show that the Home Office was also handed a £33.5m bill which relates to IR35 non-compliance.

So many people are asking, will HMRC investigate other government departments? Or have they already done so? We’ll have to wait and see, but don’t rule it out.

£87.9m signals importance of compliance

Another question resulting from the DWP story is, how does this impact contractors?

Well, first and foremost, the DWP have said they are taking steps to ensure their compliance, which includes “working more closely with HMRC, to improve our processes.”

As reported in Computer Weekly, in its annual accounts the DWP explained there had been “a
substantial investment in terms of time, effort and resources to improve the departmental position regarding compliance with IR35 requirements.”

But what about in a wider sense? Might the £87.9m figure scare private sector businesses into placing all contractors inside IR35 or mean they enforce PAYE only working?

It certainly shouldn't, is the view of SJD’s in-house IR35 expert, Jo Harris, who explained:

“This headline grabbing story and multi-million pound tax liability is a result of incorrect IR35 determinations. But by no means is it a reason for businesses to panic and stop working with contractors. If anything, given the sums reported, I expect it to encourage businesses to do everything in their power, including gaining proper advice, to make sure they engage contractors under the correct status.”

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