It has emerged that the Department for Work & Pensions (DWP) was hit with a huge £87.9 million tax bill for historic errors in the way it assessed the IR35 status of contractors.
The DWP’s tax payment came to light after the government department published its most recent set of accounts detailing its overheads for the 2020/21 financial year.
According to ComputerWeekly, the payment was made after a review of the DWP’s compliance procedures revealed in March 2020 that it had incorrectly assessed the employment status of its contractors over a period of several years.
Public sector IR35
Public sector IR35 came into force in April 2017, and from this date public sector organisations -including the DWP – assumed the responsibility for determining the IR35 status of its contractors and whether they should be taxed in the same way as permanent, salaried employees (pacing them inside IR35) or if they should be taxed as off-payroll workers (outside IR35).
The assessments are based on the work they do and how it is performed, whereas prior to April2017 the status determination was the responsibility of the contractors themselves.
If a contractor is deemed to be working inside IR35 they are expected to pay the same income tax and National Insurance Contributions (NIC) as permanent employees, but they are not entitled to the same employee benefits such as sick pay, holiday pay or maternity leave.
A similar version of the public sector IR35 reform is now in place for private sector contractors. Find out more about IR35 in our IR35 Hub.
The report stated that the tax liability payment was accepted by the DWP for missing tax and National Insurance Contributions, plus interest incurred for the financial years 2017/18 (£21.1m), 2018/19 (£36.7m), and 2019/20 (£29.7m).
A further £0.4 million was agreed against errors made for the 2020/21 tax year, bringing the total to a whopping £87.9 million.
According to ComputerWeekly, the accounts don’t go into any further detail about how the errors occurred, but department did use the HMRC’s Check Employment for Status Test (CEST) online checker tool to inform its decisions.
DWP is not the first public sector body to receive an IR35-related tax bill on the back of using the CEST tool to assess the status of its contractors. NHS Digital received a tax bill for £4.3 million in November 2019.
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