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DWP hit with £87.9m tax invoice by HMRC over ‘historic’ IR35 standing contractor evaluation errors

The Division for Work and Pensions (DWP) paid £87.9m to HM Income & Customs (HMRC) after a evaluate of its IR35 compliance procedures revealed that it had incorrectly assessed the employment standing of its contractors over a interval of a number of years.

Particulars of the cost had been revealed within the publication of DWP’s most up-to-date set of accounts, which outlines the division’s expenditures through the 2020-21 monetary yr.

Among the many expenditures listed was a cost of £87.9m made to HMRC through the 2020-2021 monetary yr, following the invention of “historic errors”, relationship again to 2017, that DWP made when assessing the tax standing of its contractors.

The doc confirmed that these errors got here to gentle in March 2020 following a evaluate by HMRC into DWP’s implementation of the IR35 tax avoidance reforms, which got here into power within the public sector in April 2017.

From this date, public sector organisations – together with DWP – assumed duty for figuring out if the contractors they interact with must be taxed in the identical method as everlasting, salaried workers (inside IR35) or off-payroll employees (exterior IR35) primarily based on the work they do and the way it’s carried out. Earlier than then, it was as much as the contractors themselves to declare whether or not their engagements had been inside IR35 or not.

An inside IR35 dedication means contractors are anticipated to pay the identical earnings tax and Nationwide Insurance coverage Contributions (NICs) as a everlasting worker, however usually are not entitled to obtain the identical office advantages as a salaried employee would.

“The outcome [of the HMRC review] was settlement on historic errors and acceptance by DWP of a legal responsibility for lacking tax/Nationwide Insurance coverage plus curiosity for the monetary years 2017-18 (£21.1m), 2018-19 (£36.7m), and 2019-2020 (£29.7m),” the report doc acknowledged.

The division additionally subsequently agreed, within the wake of HMRC’s evaluate, to just accept an extra £0.4m legal responsibility for IR35 evaluation errors that occurred through the 2020-21 monetary yr, the doc confirmed, which quantities to £87.9m in whole.

“Throughout 2020-21, the division settled IR35 tax liabilities with HM Income & Customs referring to its incorrect evaluation of the employment standing of its contractors,” the doc added.

“This cost [of £87.9m] pertains to arrears of tax due and the curiosity on these arrears; the division has not paid any penalties for non-compliance.”

Throughout the 2020-21 monetary yr, DWP engaged 1,025 contractors who had been paid at the least £245 a day for his or her providers. Out of those, 35 had their IR35 standing amended throughout this era on account of what the account doc phrases “a consistency evaluate”.

The accounts additionally verify that BPDTS, a restricted firm and arm’s-length physique initially arrange particularly to offer digital expertise providers to DWP, additionally incurred IR35-related liabilities of its personal, totalling £6.9m. The entity was absorbed into DWP in July 2021. 

The accounts don’t go into additional element concerning the nature of the errors that DWP made throughout its IR35 determinations, however it does verify the division used HMRC’s Examine Employment for Standing Take a look at (CEST) on-line checker instrument to tell its choices.

DWP just isn’t the primary public sector entity to obtain a sizeable IR35-related tax invoice after utilizing the CEST instrument to evaluate tax standing of its contractors, as NHS Digital obtained one totalling £4.3m in November 2019.

In a press release to Pc Weekly, a DWP spokesperson mentioned the division is dedicated to making sure that no additional errors in its implementation of the IR35 guidelines happen.

“DWP is dedicated to making sure that the proper tax is paid and has taken steps, together with working extra intently with HMRC, to enhance our processes,” the spokesperson mentioned.

The DWP accounts doc, in the meantime, goes into slightly extra element concerning the steps the division has taken to enhance its IR35 evaluation procedures, which to this point have included “a considerable funding by way of time, effort and sources to enhance the departmental place relating to compliance with [the] IR35 necessities”.

By the way, Pc Weekly understands that HMRC has lodged an attraction towards the end result of an IR35 tribunal involving a former DWP IT contractor, Richard Alcock, that concluded the tax assortment company was improper to pursue an unpaid tax declare of greater than £240,000. The attraction listening to is ready to happen on 2022.

HMRC claims Alcock is liable to pay NICS and earnings tax contributions totalling £243,324, accrued throughout a sequence of engagements he launched into with Accenture and DWP from the 6 April 2010 to six April 2015 tax years.

Dave Chaplin, CEO of contracting authority ContractorCalculator, advised Pc Weekly the truth that DWP used the HMRC CEST instrument in its IR35 employment standing decision-making processes is notable, given how steadily the accuracy of its outcomes have been known as into query through the years.

“The DWP is going through a invoice for £87m, having seemingly used a instrument which it was inspired to make use of by HMRC, which HMRC now seems to not be standing by, which has no foundation in regulation, and which the basics of are more likely to be known as into query inside the subsequent few months when the Courtroom of Attraction publishes its resolution,” he mentioned. 

“In contrast to non-public sector corporations, the DWP is a public sector physique, and any cash it offers to HMRC for further tax will go straight into the coffers and filter its method again to funding the invoice within the first place.  It’s robbing Peter to pay Paul.

“However the important thing query is why would the DWP even trouble spending tons of of 1000’s of kilos to defend the standing, when general the rise within the coffers for the Treasury might be successfully zero? The whole scenario is absurd.”

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