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.
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
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.
A spokesperson for the department told Computer Weekly that the DWP was committed to ensuring “that the correct tax is paid and has taken steps, including working more closely with HMRC, to improve our processes”.
Seb Maley, CEO of IR35 specialist Qdos, was critical of the use of CEST. He said: “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.
“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.
“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.”
Matt Fryer, head of legal services at Brookson Legal, said the errors were a stark example of the “risk involved in using online tools such as CEST to determine IR35 status and how relying on CEST alone does not demonstrate reasonable care or protect against HMRC fines”.
He said the tools were only as good as the information provided and were not quick fix solutions for IR35 compliance. “In fact, the latest CEST data shows 20% of its determinations are in a grey area (undetermined) which require a more nuanced exploration,” he added.
“IR35 is a hirer-led process and using CEST or ‘outsourcing’ IR35 assurance to off-payroll contractors will see the end hirer held liable for any mistakes which result in unpaid tax and national insurance contributions.
Fryer advised that while HMRC was in the “educational soft launch phase of IR35”, businesses should take the time now to evaluate their resource supply chains and ensure employment status determinations were correct. “This will help identify any errors and allow time to fix them to avoid potential legal action when HMRC begins enforcement,” he said.