NHS Digital hit with £4.3m IR35-related tax bill after using HMRC CEST tool to assess contractors

NHS Digital is still weighing whether or not to appeal against an IR35-related £4.3m bill handed to it by HM Revenue and Customs (HMRC), over claims it misclassified the tax status of its contractors.

The organisation, which acts as the technology arm to the National Health Service (NHS), published details of the tax bill in its 2018-19 annual report in October, which documented an increase in its temporary labour costs by £3.2m to £16.3m since the 2017-18 financial year.

The tax bill covers the period from 1 April 2017 to 31 December 2018, which is the time during which NHS Digital said it relied on HMRC’s “toolkit” to assess the tax status of the contractors it engages with.

As a public sector body, NHS Digital assumed responsibility in April 2017 for individually determining if the contractors it engages with should be taxed in the same way as salaried workers (inside IR35) or as off-payroll employees (outside IR35), whereas previously it had been down to the contractors themselves to decide.

To assist the public sector with its new-found responsibilities and alleviate some of the associated administrative burden, HMRC introduced its Check Employment Status for Tax (CEST) tool in March 2017, with the results immediately declared “inaccurate” and “unreliable” by IR35 stakeholders.

HMRC has always defended CEST from such criticism by stating the tool has been subjected to rigorous testing, and that it does return accurate results provided it is used correctly. 

The NHS Digital annual report said, in response to the IR35 public sector reforms coming into force in April 2017, the organisation undertook a “considered assessment of the status for each individual contractor, which we believed met the HMRC requirements”.

However, the tax collection agency has since called its approach into question, despite it incorporating the tools supplied by HMRC, and served it with a sizeable tax bill, prompting NHS Digital to seek out alternative means of assessing its contractors.

“Up to December 2018, we assessed all contractors using the toolkit supplied by HMRC. From January 2019, we are now making an initial assessment internally. Any contractors considered to be outside of scope are then being reassessed by an external provider,” reads the NHS Digital annual report.

In a statement to Computer Weekly, an NHS Digital spokesperson confirmed the organisation is still using CEST, but clarified that it plays “one part” in its overall approach to addressing the IR35 regulations.

Public sector organisations are under no obligation to use CEST to carry out IR35 status determinations, and are within their rights to use third-party tools for this work.

“Discussions are ongoing with HMRC on potential liabilities and we are unable to say whether the application of the CEST tool has led us to possibly higher liabilities,” the NHS spokesperson said. 

“We are now additionally using a third-party assessment for completeness. This is provided through our contractor supply agency to give additional assurance that we are operating the regulations correctly. 

“Until we fully understand the legal reasoning of an assessment produced by HMRC, we will not make a decision on whether to appeal,” the spokesperson added.

This is not the first time the health service’s interpretation and implementation of the IR35 reforms has been queried since the reforms were rolled out across the public sector.

As previously reported by Computer Weekly, health service watchdog NHS Improvement was forced to issue clarifying guidance just over a month after the reforms came into play in May 2017, after admitting to mistakes in its interpretation of the new rules.

These mistakes led to parts of the NHS receiving guidance telling them that contractors who had been supplying services to the health service before the reforms should be classified as being inside IR35, making them liable to pay the same employee-related taxes as permanent workers.

However, NHS Improvement soon revised that this stance, and issued corrective guidance stating this blanket-like approach to classifying contractors was incorrect, and that NHS organisations must assess each contractor’s status on a case-by-case basis.