DWP hit with £87.9m tax bill by HMRC over 'historic' IR35 status contractor assessment errors

The Department for Work and Pensions (DWP) paid £87.9m to HM Revenue & Customs (HMRC) after a review of its IR35 compliance procedures revealed that it had incorrectly assessed the employment status of its contractors over a period of several years.

Details of the payment were revealed in the publication of DWP’s most recent set of accounts, which outlines the department’s expenditures during the 2020-21 financial year.

Among the expenditures listed was a payment of £87.9m made to HMRC during the 2020-2021 financial year, following the discovery of “historic errors”, dating back to 2017, that DWP made when assessing the tax status of its contractors.

The document confirmed that these errors came to light in March 2020 following a review by HMRC into DWP’s implementation of the IR35 tax avoidance reforms, which came into force in the public sector in April 2017.

From this date, public sector organisations – including DWP – assumed responsibility for determining if the contractors they engage with should be taxed in the same way as permanent, salaried employees (inside IR35) or off-payroll workers (outside IR35) based on the work they do and how it is performed. Before then, it was up to the contractors themselves to declare whether their engagements were inside IR35 or not.

An inside IR35 determination means contractors are expected to pay the same income tax and National Insurance Contributions (NICs) as a permanent employee, but are not entitled to receive the same workplace benefits as a salaried worker would.

“The result [of the HMRC review] was agreement on historic errors and acceptance by DWP of a liability for missing tax/National Insurance plus interest for the financial years 2017-18 (£21.1m), 2018-19 (£36.7m), and 2019-2020 (£29.7m),” the report document stated.

The department also subsequently agreed, in the wake of HMRC’s review, to accept a further £0.4m liability for IR35 assessment errors that occurred during the 2020-21 financial year, the document confirmed, which amounts to £87.9m in total.

“During 2020-21, the department settled IR35 tax liabilities with HM Revenue & Customs relating to its incorrect assessment of the employment status of its contractors,” the document added.

“This payment [of £87.9m] relates to arrears of tax due and the interest on those arrears; the department has not paid any penalties for non-compliance.”

During the 2020-21 financial year, DWP engaged 1,025 contractors who were paid at least £245 a day for their services. Out of these, 35 had their IR35 status amended during this period as a result of what the account document terms “a consistency review”.

The accounts also confirm that BPDTS, a limited company and arm’s-length body initially set up specifically to provide digital technology services to DWP, also incurred IR35-related liabilities of its own, totalling £6.9m. The entity was absorbed into DWP in July 2021. 

The accounts do not go into further detail about the nature of the errors that DWP made during its IR35 determinations, but it does confirm the department used HMRC’s Check Employment for Status Test (CEST) online checker tool to inform its decisions.

DWP is not the first public sector entity to receive a sizeable IR35-related tax bill after using the CEST tool to assess tax status of its contractors, as NHS Digital received one totalling £4.3m in November 2019.

In a statement to Computer Weekly, a DWP spokesperson said the department is committed to ensuring that no further errors in its implementation of the IR35 rules occur.

“DWP is committed to ensuring that the correct tax is paid and has taken steps, including working more closely with HMRC, to improve our processes,” the spokesperson said.

The DWP accounts document, meanwhile, goes into a little more detail about the steps the department has taken to improve its IR35 assessment procedures, which so far have included “a substantial investment in terms of time, effort and resources to improve the departmental position regarding compliance with [the] IR35 requirements”.

Incidentally, Computer Weekly understands that HMRC has lodged an appeal against the outcome of an IR35 tribunal involving a former DWP IT contractor, Richard Alcock, that concluded the tax collection agency was wrong to pursue an unpaid tax claim of more than £240,000. The appeal hearing is set to take place on 2022.

HMRC claims Alcock is liable to pay NICS and income tax contributions totalling £243,324, accrued during a series of engagements he embarked on with Accenture and DWP from the 6 April 2010 to 6 April 2015 tax years.

Dave Chaplin, CEO of contracting authority ContractorCalculator, told Computer Weekly the fact that DWP used the HMRC CEST tool in its IR35 employment status decision-making processes is notable, given how frequently the accuracy of its results have been called into question over the years.

“The DWP is facing a bill for £87m, having seemingly used a tool which it was encouraged to use by HMRC, which HMRC now appears to not be standing by, which has no basis in law, and which the fundamentals of are likely to be called into question within the next few months when the Court of Appeal publishes its decision,” he said. 

“Unlike private sector companies, the DWP is a public sector body, and any money it gives to HMRC for extra tax will go straight into the coffers and filter its way back to funding the bill in the first place.  It’s robbing Peter to pay Paul.

“But the key question is why would the DWP even bother spending hundreds of thousands of pounds to defend the status, when overall the rise in the coffers for the Treasury will be effectively zero? The entire situation is absurd.”