DWP faced with £87.9m tax bill for incorrect IR35 status determinations

Experts say this is a ‘clear example’ of the risk of relying on HMRC’s check employment status tool to inform decisions

The Department for Work and Pensions (DWP) has been billed £87.9m for incorrectly determining the IR35 status of its contractors, with experts saying the incident demonstrates the “clear risks” of getting status assessments wrong.

The bill covers missing tax and national insurance contributions owed to HMRC between 2017 and 2021, according to the department’s public accounts of expenditures over the last year.

Matt Fryer, head of legal services at Brookson Legal, said the bill should act as a lesson for private sector businesses who might be relying on HMRC’s check employment status for tax (CEST) tool to assess the status of their contractors.

“Businesses are somewhat reliant on CEST because it’s free, but clearly, what may not have hit home is that you still need a general understanding of employment status to ensure you’re answering the questions correctly,” he said.

“This is a clear example of the risk involved in using online tools such as CEST to determine IR35 status. Relying on CEST alone does not demonstrate reasonable care or protect against HMRC fines.”

Fryer added that, with the same rules now applying to the private sector, employers should pay close attention to how the rule is being enforced in the public sector. “It’s almost a trial run to see how the rules are applied,” he said.

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Under IR35, if a contractor is deemed to carry out similar or the same work as a permanent staff member, their employer is required to deduct income tax and national insurance contributions as if they were an employee. The legislation was introduced in 2000 to ensure workers undertaking similar roles paid similar tax regardless of whether they are an employee or a contractor.

When it was first introduced it was the contractor’s responsibility to declare their own tax status. However in 2017 – in a bid to tackle non-compliance – this responsibility shifted in the public sector to the end hirer.

In April this year, after being pushed back a year because of the coronavirus pandemic, this change also came into force in the private sector.

HMRC has said it would not charge any penalties on private sector businesses until April 2022. However, Alison Woods, partner and co-head of employment at CMS, warned that DWP’s bill “highlights that HMRC’s audit powers are wide should they choose to use them”.

“The entire situation is absurd,” said Dave Chaplin, chief executive of IR35 Shield, who noted that, unlike in the private sector, any additional tax paid by DWP would eventually “filter its way back”.

“The DWP clearly would not bother spending hundreds of thousands of pounds to defend the status, when overall the rise in the coffers for the Treasury will be effectively zero,” he said.

Most businesses, however, would not be able to foot a bill this big, said Kate Cottrell, managing director of Bauer and Cottrell, who described this as “a lesson for all medium and large businesses currently faced with the same rules”.

But Cottrell noted that HMRC has had “little success” when its determinations have been challenged by businesses in the courts, highlighting the importance that firms “seek specialist IR35/ off-payroll advice in order to have peace of mind”.