During its 2020-21 financial year, the Department for Work and Pensions (DWP) settled £89.7m in tax liabilities for the incorrect assessment of its contractors IR35 status.
The DWP accounts tell us very little about how these errors occurred, but what we do know is that the DWP used the widely criticised CEST (Check Employment Status Tool) for conducting their IR35 assessments.
Perhaps of more interest is the fact that these assessments were carried out by the contractors line manager, who probably had little, or no experience in employment and tax law.
So, herein lies the problem with using an automated tool. If the incorrect information is entered, it will produce an incorrect result.
With incorrect results, comes a significant tax bill.
So how could things have been done differently at the DWP?
Deciding a workers employment status for tax is a complex question. To make an accurate assessment you need two essential pieces of information, what do the contract terms imply and more importantly, what are the working practices of the engagement?
Only when those two sets of information are considered side by side, can an accurate assessment be made.
Given the significant errors reported by the DWP, it is clear they did not consider all the facts for each and every engagement.
Too often the contracting population gets caught up with the right of substitution being the principal hurdle that defines their IR35 status. This is far from the truth and the unfettered right of substitution is just one of many conditions an experienced IR35 assessor would consider.
How difficult can it be to make a decision?
The IR35 status decision is binary, it’s either Inside IR35, or Outside IR35.
However, with the large number of inputs required to make that decision, it can be easy to arrive at an inconclusive decision.
This can be seen in that latest CEST usage data released by HMRC, as the tool was unable to issue a determination in over 20% of the assessments completed.
How could IR35 Navigator have helped the DWP?
The significant tax liabilities incurred by the DWP could have been avoided had they sought independent professional advice from an IR35 expert.
IR35 Navigator is not an automated assessment tool, it’s a compliance framework that supports the IR35 assessment process.
Once the supply chain has been identified and vetted, the IR35 Navigator platform intelligently gathers the required evidence, whereupon experienced IR35 assessors will conduct a thorough review before issuing the status determination statement.
Where there are inconsistences, these will be highlighted with clear guidance on how they could be corrected.
Once accepted, the Status Determination Statement will be passed along the supply chain in accordance with off-payroll working legislation, with all documentation recorded on a publicly verifiable blockchain to provide immutable evidence to HMRC of the how the decision has been reached.
To find out more about IR35 Navigator, or to request a demonstration, please contact us on 020 3468 0008 or email@example.com.
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