IR35 is arguably one of the most contentious, tax-related pieces of legislation that the government has introduced in recent years. However, recent news leads us to wonder if there is one IR35 rule for them and another one for the rest of us…
It’s not as if the government doesn’t have form here. The crass attempt to remove the Prime Minister and Chancellor from the requirement to self-isolate is reckoned to have cost both men and the Conservative Party a few percentage points in their respective poll ratings. IR35 doesn’t resonate with the general public to the same extent, but for those who are affected, the following story may well provoke a similar reaction.
The Department for Work and Pensions (DWP) is reported to have paid £87.9m to HMRC after a review of its IR35 compliance procedures. This review revealed that the DWP had incorrectly assessed the employment status of its contractors. To make matters worse, the reason for this incorrect assessment was that the DWP was using the Check Employment Status Tool (CEST), an online platform devised and recommended by (wait for it) HMRC. The latter is now doing a reverse ferret and seemingly stating that CEST is not really guaranteed to produce reliable results now. The strange thing is tax professionals like ourselves have been saying that for years now!
The nitty-gritty is as follows:
In March 2020, the DWP received a Letter of Offer from HMRC that formally concluded its review of IR35 implementation in DWP.
This resulted in an agreement on the historic errors made by the DWP when assessing the tax status of its contractors. In turn, this led to an acceptance by the DWP of liability for tax/National Insurance contributions plus interest for the financial years from 2017.
The pensions department owed HMRC £21.1m from 2017-18, £36.7m from 2018-19, £29.7m from 2019-20, and a liability payment of £400,000 for 2020-21. A further liability of £6.9m was recognised in the departmental group financial statements for arrears of tax (plus interest) due from BPDTS, a limited company initially set up specifically to provide digital technology services to DWP and which was absorbed into DWP in July 2021).
The DWP published its annual report and accounts a few weeks ago (in July 2021) and these showed a payment of £87.9m made to HMRC during the 2020-21 financial year. This payment was listed (seemingly without any irony) as ‘Fruitless payments’ on the annual report with an explanation stating that ‘this payment relates to arrears of tax due and the interest on those arrears; the department has not paid any penalties for non-compliance’ (our underlining).
Bear in mind that the requirement for the public sector to take responsibility for its contractors under IR35 started in 2017. Does this mean the DWP inadvertently committed tax evasion? Probably not, but without a doubt they will be guilty of tax avoidance and this is where the sheer hypocrisy kicks in. HMRC and government ministers are relatedly talking about the evils of tax avoidance and yet the largest government department is doing exactly that to the best part of £100 million. Also, why no penalty? If other taxpayers were guilty of avoidance to this scale we would be surprised if a penalty was not applied. If this situation happens post-April 2021 to a private sector firm, will they have had any fine waived for non-compliance? And if a disputed case heads to court will the case of the DWP v HMRC be used to support any private sector client who has made a similar, inadvertent mistake?
Two final points … Who do you think will actually be providing the money for the £87,900,000 that the DWP needs to pay to HMRC and why on earth were hundreds of thousands of pounds spent by the DWP defending the position? OK, in Whitehall terms it isn’t much but who on earth saw fit to defend this? The entire situation is absurd.
If there is a positive, HMRC now at least seem to accept that CEST is not fit for purpose.
Stewart McKinnon, Director, M&S Accountancy & Taxation