A government department fails to interpret IR35 correctly and faces an £87.9 million tax bill

A government department fails to interpret IR35 correctly and faces an £87.9 million tax bill

More IR35 confusion has come to light, this time from the Department for Work and Pensions (DWP). A review into the DWP’s IR35 compliance has unveiled an £87.9 million payment to HMRC. This payment is a result of years of inaccurate IR35 employment status assessments of contractors.

IR35 is complex, but…

There is no denying that IR35 legislation is complex. However, if you still need convincing – how about this for proof? The Department of Work and Pensions (DWP) has been gifted a huge tax bill – upwards of £85 million because it has incorrectly assessed the IR35 statuses of its contractors. The tax bill was unveiled in the governments most recent set of accounts. Computer Weekly describe the bill as a result of “historic errors”, some dating back to 2017.

IR35 assessments are challenging but it’s worrying to see a government department unable to make accurate assessments and interpret IR35 legislation. And, the DPW’s error isn’t the first time the government has been left red-faced after an IR35 investigation.

There have been many high profile cases where HMRC has gone after limited company contractors, only to lose when the cases have gone to a tribunal. For example, HMRC lost a £124,000 case against Loose Women host Kaye Adams for contracts between 2015 and 2017.

It’s worth adding that there is a very high-profile IR35 battle (worth almost £5 million) going on at the moment between HMRC and English footballing legend Gary Lineker.

CEST to blame?

The DWP experienced difficulties in assessing IR35 after the public sector reform (often referred to as off-payroll working rules). HMRC investigated the DWP’s handling of the intermediaries legislation in March 2020 and found a series of errors. Interestingly, in 2021-22, the DWP worked with over 1,000 contractors earning a minimum of £240 per day. Out of these, 35 had their employment statuses changed in what the government referred to as a “consistency review”.

Almost unbelievably, the DWP used the governments IR35 assessment tool to determine the employment status of their contractor workforce. CEST has often been scrutinised and described by IR35 experts as not fit for purpose.

In a quote on Contractor Weekly, Andy Chamberlain, the Director of Policy at IPSE (The Association of Independent Professionals and the Self-Employed) 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?

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.”

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