A £87.9 million tax bill hit the Department for Work and Pension (DWP) due to mistakes made when assessing contractor engagements for IR35 using HMRC’s CEST tool. Here, employment law specialists David Sheppard and Rebecca Mahon explore what this means for employers.
Since 2017, public sector organisations have been responsible for assessing whether a contractor has employee or worker status for tax purposes, and whether the arrangement is inside or outside IR35. This responsibility extended to include medium and large private sector companies in April 2021. If an arrangement is inside IR35, the party receiving the benefit of the contractor’s services must deduct income tax and National Insurance contributions from any payment of fees.
HMRC created the online CEST tool to assist clients using the services of contractors to determine whether IR35 applies. HMRC will honour the outcome of the CEST tool, but, and importantly, with the disclaimer that the outcome will be upheld only if the information provided is accurate.
Upon publication of their 2020-21 accounts, it was revealed that DWP paid an eye-watering tax bill of £87.9million in light of several incorrect IR35 assessments. The bill is made up of arrears of tax due plus interest for historic mistakes made since the 2017 IR35 reforms for the public sector.
DWP’s errors came to light following a review by HMRC in March 2020 into the organisation’s implementation of their IR35 assessments. There is no detail as to what kind of errors DWP made in their assessments, but it has been confirmed that they were carried out using the CEST tool. This shocking bill is not the first of its kind, and NHS Digital was also hit with a £4.3million bill in light of CEST tool mistakes back in 2019.
The size of DWP’s bill highlights the real and significant risks involved when engaging contractors through intermediaries, and even large organisations and central government are getting it wrong. Not only does this story highlight the difficulties that public sector organisations have had in implementing their responsibilities since the 2017 reforms, but it also highlights what is potentially to come for the medium and large private sector businesses to whom the same rules and exposure now apply since 6 April 2021.
The limitations of the CEST tool must be recognized by the public and private sector organisations who are, in some cases, relying on its outcomes to determine where millions of pounds worth of tax and NI end up. The algorithm that sits behind the tool is, we understand, regularly tweaked in order to provide the best possible outcomes, but that algorithm is only as good as the information input by the client in the first place.
HMRC have demonstrated that it will rely on the tool’s disclaimer to challenge IR35 assessments, and will robustly seek repayment of tax even in cases where CEST has suggested it isn’t payable. It is clear that compliance with IR35 is high on HMRC’s agenda and businesses should therefore be seeking to evaluate their engagement with all contractors extremely carefully to avoid ending up in a similar situation.
Considering the potential for severe financial consequences through using the CEST tool alone to assess engagements, we recommend getting a sound view from a human being, rather than an algorithm. Get in touch with our IR35 expert, David Sheppard, to understand the limitations of the CEST tool where there are questions of degree in the IR35 assessment.