The Department for Work and Pensions has been billed £87.9m over historic IR35 status contractor assessment errors - and experts state that this demonstrates the risk of relying on the check employment status tool (CEST) provided by the HMRC.
Details of this payment were revealed in the publication of the Department for Work and Pensions most recent accounts, which outline expenditure made by the department during the 2020-21 financial year. The errors were found in March 2020, following a review by HMRC into the Department for Work and Pensions’ implementation of the IR35 tax avoidance reforms.
The IR35 tax avoidance reforms came into force in the public sector in April 2017 and from this date, organisations assumed responsibility for determining if the contractors they engage with should be taxed in the same way as permanent, salaried employees, i.e. inside IR35. However, although they would be expected to pay the same tax and Nation Insurance contributions as a permanent employee, they are not entitled to receive the same workplace benefits as a salaried worker.
Outside IR35 - or off-payroll workers - are determined based on the work they do and how it is performed. Prior to April 2017, it was left to the contractors themselves to declare whether their engagements were inside IR35 or not.
Matt Fryer - Head of Legal Services at Brookson Legal - said:
“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. 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.”
Matt Fryer added that - with the same rules now being applied in the private sector - employers should pay close attention to how the rule is being enforced in the public sector.
HMRC has said it will not charge any penalties on private sector businesses until April 2022.
Alison Woods - Partner and co-head of employment at international law firm CMS - warned that the Department for Work and Pensions bill “highlights that HMRC’s audit powers are wide should they choose to use them”.
Dave Chaplin - Chief Executive of IR35 Shield - said:
“The entire situation is absurd.”
He remarked that any additional tax paid by the Department for Work and Pensions would eventually “filter its way back” adding:
“The Department of Work and Pensions 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.”
Kate Cottrell - Managing Director of Bauer and Cottrell - IR35 and Off-Payroll status specialists - stated that most businesses would not be able to foot a bill that big and said it was “a lesson for all medium and large businesses currently faced with the same rules”.
