DWP issued ‘eye-watering’ £87.9m tax bill due to incorrect IR35 assessments

Martin Lewis talks self-employed pension options with expert

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IR35 reforms were launched in 2017 for public sector workers, as all public bodies became responsible for determining the tax status of contractors they hired. On April 6, 2021, similar changes were introduced for the private sector.

Since April, medium to large businesses have been required to access the tax status of contractors they hire.

Many feared these changes would hamper the usage of contractors and freelancers as financial and administrative costs rose for companies.

The Government was urged by many experts in the field to pause or reverse this action as workers may have struggled as a result, especially in the face of continued coronavirus uncertainty.

Additionally, many argued the Government’s assessment tools were not up to scratch, leaving it unclear which specific workers or industries would be affected.

This view appears to be supported as it emerged recently the DWP has been issued with a £87.9million tax bill, as a result of incorrectly determining the IR35 status of contractors since the 2017 changes.

Seb Maley, the CEO of IR35 specialist Qdos, commented: “£87.9million is an enormous tax liability and just goes to show the cost of non-compliance.

“Given HMRC’s very own IR35 tool – CEST – was used to assess the IR35 status of contractors, here we have proof that using it can easily lead to mistakes and staggering financial consequences.

But businesses aren’t required to use the tool and, as we can see here, there’s zero guarantee that HMRC will stand by the answers it delivers.

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“While DWP’s tax bill is eye-watering, the fact that it’s a Government body means the financial blow will be less felt in this scenario.

“Even so, this isn’t a reason for other firms to stop engaging contractors. Having worked with dozens of public sector bodies since 2017, we have shown that with a robust, fair process and detailed audit trail, organisations can keep challenges like this at bay.

“This is another high profile IR35 story that involves millions of pounds.

“And as far as I’m concerned, HMRC have sent a clear signal of intent.

“Compliance in this area sits high on the tax office’s agenda and following reform to IR35, they are now in a position to approach businesses along with contractors.”

These findings followed recent research from Qdos, in which 59 businesses affected by the reform were surveyed.

The results of this survey showed four in 10 businesses impacted by recent changes to IR35 in the private sector have admitted they would approach the changes differently if given the opportunity.

Meanwhile, nearly a third (30 percent) are already reviewing their strategy for managing the reform despite the changes only coming into force recently.

The same research showed the reform has resulted in confusion, contractors leaving projects, additional costs and project delays.

When asked how businesses would change their approach, the majority (52 percent) said they would have started preparations earlier, 10 percent would not have used HMRC’s IR35 tool (CEST), 10 percent would reverse contractor bans, 14 percent would have engaged the help of an IR35 specialist and the remaining 14 percent cited other factors, including “campaigning rigorously against it”.

These firms also highlighted the challenges created by IR35 reform.

The overriding ones were confusion around the rules (74 percent), contractors leaving (59 percent), indeterminate IR35 status decisions provided by CEST (37 percent) and project delays (30 percent).

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