In recent months it has been revealed, via their respective 2020-21 Annual Report and Accounts, that three public sector bodies – the Department of Work and Pensions, the Home Office and HM Courts and Tribunals Service were found to have missed the mark in their off-payroll obligations.
These errors lead to them all being subject to substantial tax and NIC arrears, plus interest (and in one case, a suspended penalty), being payable to HMRC. In this blog, we take a look at what has happened with these cases and how the public sector bodies assessed contractor IR35 status.
DWP’s £87.9m IR35 tax bill
Back at the end of July, we reported that the Department of Work and Pensions (DWP) had been hit with an £87.9m IR35 bill by HMRC. HMRC concluded their status review in March 2020 and this culminated in the DWP being landed with a tax/NIC bill, plus interest of £87.9 million, covering the period from 6 April 2017 – (the date when the off-payroll rules came in for the public sector), until the 5 April 2021.
As of 31 March 2021, 855 contractors were working within the core department earning at least £245 per day, of which:
- 432 existed less than 1 year;
- 142 existed between 1 – 2 years;
- 135 existed between 2 -3 years;
- 82 existed between 3 -4 years;
- 64 existed for more than 4 years.
From 6 April 2020 to 31 March 2021, 97 contractors working within the core department had their engagements re-assessed for consistency/assurance purposes, with 35 seeing a change to their IR35 status as a result of that review.
We know the DWP used CEST when assessing contractor status, but we do not know what areas of employment status they got wrong.
Home Office received suspended IR35 penalty
Not long after the news broke that the DWP had received a tax bill, at the beginning of August it was reported that the Home Office had been fined by HMRC over incorrect IR35 assessments.
In 2018, HMRC initiated their status enquiry and when this was eventually concluded, the Home Office were presented with a tax/NIC bill of £29.5 million, plus interest. Just like the DWP, this fine was for incorrect assessments from April 2017 when the public sector reforms into effect. In the case of the Home Office, the assessment errors ran up until 31 March 2021.
In addition, the Home Office was handed a £4 million penalty for ‘careless’ behaviour, which was suspended for 3 months subject to certain conditions. Those conditions related to the Home Office meeting their notification and filing obligations, a 100% assurance check on all out of scope determinations, improved governance around their use of contractors and contingent labour, improved training of hiring managers and improved monitoring and assurance over compliance with IR35 – not just at the point of procurement but throughout the contract life-cycle.
The Home Office expected to meet those conditions.
As of 31 March 2021, 208 contractors were working within the main department earning at least £245 per day, of which:
- 125 existed less than 1 year;
- 50 existed 1 – 2 years;
- 33 existed 2 – 3 years.
During the period 6 April 2020 to 31 March 2021, 141 contractors had their engagements re-assessed for consistency/assurance purposes, with 90 seeing a change to their IR35 status as a result of that review.
HM Courts and Tribunal vs HMRC
Not long after the Home Office, HM Courts and Tribunal Service received a £12.5 million IR35 bill. The HM Courts and Tribunal is an executive agency of the Ministry of Justice (MoJ). In 2019, HMRC challenged the MoJ to revisit employment status determinations for off-payroll workers engaged between 6 April 2017 to 5 April 2020.
During this time, the MoJ had concluded workers were operating outside of the off-payroll working rules on the basis the individual worker could be substituted by another worker at the choice of the worker, without consultation with the Departmental and without the Departmental having any right of veto.
As of 31 March 2020, 81 contractors, earning at least £245 per day, were working within HMCTS, of which:
- 55 existed less than 1 year;
- 18 existed between 1 – 2 years;
- 6 existed between 2 – 3 years;
- 1 existed between 3 – 4 years;
- 1 existed for more than 4 years.
The number of new engagements where the rate of pay was at least £245 per day, or those that reached 6 months during the period 1 April 2019 to 31 March 20, was 68 of which:
- 19 were assessed ‘inside’ IR35;
- 49 were assed ‘outside’ IR35.
Furthermore, 7 saw a change to their IR35 following a re-assessment.
The department used CEST in making its status determinations. The report states that they applied the off-payroll rules with due diligence and care, taking a considered assessment of each contractor in the first instance, hence why no penalty was levied by HMRC.
Use of CEST
The size of these tax liabilities puts into question how seriously these departments took their IR35 obligations following the introduction of the off-payroll rules to the public sector in April 2017. As shown in both the DWP and the HM Courts and Tribunal, a reliance on CEST alone may not be sufficient.
When using CEST, it is necessary to have a good grasp of the rationale behind the relevant tests of employment status to understand the questions fully.
Due to the incorrect assessments made, it begs the question of how much time and money was invested in educating responsible officers and putting into place robust systems. Government departments will naturally use CEST, as it is HMRC’s own invention and they will stand by its results, provided the information fed into it is accurate.
It, therefore, appears that a full interrogation of a contractor’s status, applying all the relevant tests, may not have been undertaken – whether that be down to time issues, a lack of understanding, complacency, other factors, or a combination of all of these. Whilst the current incarnation of CEST has improved, it is still not complete nor fully reliable due to HMRC’s refusal to acknowledge the intricacy of MOO.
Organisations should take caution on HMRC’s promise to stand by CEST determinations because they do tend to apply facts and interpret status tests in a nuanced way.
An alternative to CEST
These recent cases demonstrate that the use of the CEST tool may not be the fail-safe option that many had hoped for. If you require assistance with IR35, Kingsbridge is here to help. To find out more about how we can support you, email IR35@kingbsridge.co.uk.
Our award-winning IR35 status tool can serve as an alternative to CEST. The hybrid tool has been designed to offer a comprehensive and clear tool, with easy to understand questions. In the event of an indeterminate IR35 result, the case is passed to our expert IR35 team for manual review, unlike CEST where an indeterminate result could leave you in limbo.
And, if you are concerned about your liabilities, you could get protection with our Off-Payroll Protect insurance.
