Incorrect IR35 decisions cost DWP £87.9m

The Department of Work and Pensions (DWP) has been billed a staggering £87.9 million by HMRC for failing to correctly determine the tax status of its contractors.

In April this year, IR35 reforms were introduced for the private sector, which moved the responsibility for determining whether a contractor is inside IR35 from the contractor to the fee payer. If the contractor falls inside IR35, the fee payer must make deduct tax and national insurance contributions from their pay in the same way they would for an employee.

However, these reforms were introduced to the public sector back in April 2017 with the public body taking on responsibility for determining the contractor’s status.

The DWP had used the Government’s Check Employment Status for Tax (CEST) tool to make their determinations but had failed to reach the correct decisions during the 2017-18, 2018-19, and 2019 – 20 tax years. This resulted in a £87.9 million bill covering the income tax and NICs owed, plus interest.

This decision highlights the consequences of failing to comply with IR35, and the potential for a serious tax bill if companies fail to reach the correct decision. It also indicates that despite the updates to the tool, there is still a risk to companies who rely solely on the CEST tool when making their determinations.

Given the risk that comes with an incorrect determination, it is strongly advised that companies required to issue a status determination seek legal advice. if you would like any assistance on any aspect of compliance with IR35, contact our employment lawyers.