Department for Work and Pensions laden with huge IR35 bill

Regular readers will recall our many articles over the years covering HMRC’s attempts to provide concise pre-packaged assistance to businesses as they grapple with the seemingly straightforward but evidently extremely complicated question of employment status. Electronic online tools such as the Employment Status Indicator (ESI) and the more recent and much vaunted Check Employment Status for Tax (CEST) have been publicised as the ‘all singing and dancing’ answer. Despite HMRC’s protestations and claims neither have proved particularly effective, to say the least, and not unsurprisingly so given the content. CEST has many detractors and with good cause not least the simplistic view of Mutuality of Obligations (MOO) which we have addressed in several earlier updates including see here. In our view, it provides for a substantive flaw. Nevertheless, HMRC continue to plough ahead regardless and vow to accept any outcome it provides save the usual caveats about the answering of questions and provision of accurate information.

Background

The chequered history of the tool continues given reports that the latest set of annual accounts for the Department for Work and Pensions (DWP), no less, reveal it had been smacked with a bill of £87.9 million by Her Majesty’s Revenue & Customs (HMRC). This followed introduction of the off-payroll rules in 2017 specific to the Public Sector and arose due to the incorrect tax treatment of payments made to a number of contractors it had engaged. We understand the DWP had utilised the CEST tool to assess the employment status of its contractors over several years and made payments in accordance with the outcome believing the off-payroll rules had been suitably considered and the engagements were not caught. Following a review that HMRC carried out in March 2020, it deduced otherwise which the DWP has duly accepted without challenge. Well, why would they dispute it given the monetary consequence for either department is neither here nor there and they are on the same side, so to speak. It seems a shambolic situation. A government department relying upon the result provided by a tool championed by another government department and that same department then turning the result on its head.

It is yet another example of the limitations of CEST. Further, whilst we are not privy to all the detail and reasons for the HMRC action, it brings into question the validity of a result provided by the tool and HMRCs vow to honour the outcome.

A crumb of information which we gather has been sourced from the DWP accounts document confirms that the department has taken steps to improve its assessment procedures and allocated substantial investment in terms of time, effort, and resources to improve IR35 compliance. Reading between the lines perhaps it is no longer a tick and turn exercise reliant on an online tool provided by another government department which holds little water and is decidedly leaky.

Comment

This tale provides yet more proof, if ever it were needed, that relying on an online tool albeit one provided and lauded by HMRC does not mean a business is safe from scrutiny or challenge. As always, our advice is to consider each engagement comprehensively to determine whether the off-payroll rules may kick in or indeed employment status in general and not rely solely on such as the CEST tool.

For further advice or information please contact the Chartergates Team.