The Department for Work and Pensions (DWP) and Home Office 2020-21 accounts reveal that their failure to test employment status of workers and to apply the public sector Off-Payroll Working rules cost them £117m. HM Revenue & Customs (HMRC) also charged the Home Office a 4million penalty for error. This was later suspended.
- Public sector engagements have been subject to New Off-Payroll Working rules since 6 April 2017.
- Where a public authority contracts with a worker to provide services through an intermediary, the new rules make the public authority, rather than the worker’s Personal Service Company, responsible for IR35, and assessing the tax status of the contract.
- Where required under the rules, the public authority is also responsible for deducting Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs) from fees paid.
The DWP’s 31 March 2021 accounts show that despite using HMRC's Check Employment Status for Tax (CEST) tool, errors in applying the new rules since 2017-18 were identified by HMRC resulting in a liability for the DWP totalling £87.9m in tax, NI and interest.
The Home Office accounts show a similar position. An enquiry by HMRC identified instances where the tax status of contractors was incorrectly determined.
- HMRC raised an assessment of tax and NI on the Home Office totalling £29.5m, plus interest, for the period 6 April 2017 to 31 March 2021.
- A carelessness penalty of £4m, suspended for three months, was also charged.
The Home Office's accounts do not indicate whether it, like the DWP, used HMRC's CEST tool when determining worker status.
In the year to 31 March 2021, the Home Office recorded 141 off-payroll engagements paid more than £245 per day that were either new or reached a duration of six months in the period. Of those, 90 had their status changed in the year following a consistency review.
Useful guides on this topic
Off-Payroll Working: PSCs & Public Sector Engagers
The 'Off-Payroll Working' rules move IR35: the responsibility to assess a worker's employment status and to deduct Pay-As-You-Earn (PAYE) and National Insurance Contributions (NICs) from a worker's fees, away from the worker's company to the End-Client in the labour supply chain.
IR35: Off-Payroll Working
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Personal Service Company (PSC) tax
What is a PSC? What are the tax implications for a PSC?
Employment status & detailed checklist
Why is it important to check my employment status? What tests should I use? What is the recent caselaw?