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A UK government department has had to pay £87.9m to the tax authorities because of incorrect assessments of the IR35 status of contractors, despite using the HMRC’s online checker tool to ensure its decisions were correct.
The Department for Work and Pensions (DWP) made the payment because a review of its IR35 compliance procedures revealed a number of mistakes, which have been included in its 2020-21 accounts.
[pullquote]Given HMRC’s very own IR35 tool was used to assess the IR35 status of contractors, here we have proof that using it can easily lead to mistakes and staggering financial consequences” – Seb Maley, CEO, Qdos [/pullquote]
The errors leading to the payment went back to 2017, when public sector bodies had to alter the status of contractors under new IR35 rules aimed at preventing tax avoidance by “freelancers”.
The HMRC review of the DWP's compliance with the rules resulted in “agreement on historic errors and acceptance by DWP of a liability for missing tax/National Insurance plus interest for the financial years 2017-18 (£21.1m), 2018-19 (£36.7m), and 2019-2020 (£29.7m),” the tax agency's report stated.
The document added: “During 2020-21, the department settled IR35 tax liabilities with HM Revenue & Customs relating to its incorrect assessment of the employment status of its contractors.” It said the £87.9m payment related to “arrears of tax due and the interest on those arrears; the department has not paid any penalties for non-compliance.”
Over the 2020-21 financial year, DWP used the services of 1,025 contractors who were paid a minimum of £245 a day for their services. Out of these, 35 had their IR35 status amended during this period.
The accounts show that BPDTS, a limited company and arm’s-length body set up to provide digital technology services to DWP, also incurred IR35-related liabilities, which added up to £6.9m. The entity was absorbed into DWP in July 2021.
The accounts show that the DWP used HMRC’s Check Employment for Status Test (CEST) online checker tool to help make its decisions.