Defra to pay £86.5m in IR35 error

2 December 2022

It’s been over a year since the introduction of IR35 reforms in the private sector, and five years since they were introduced in the public sector, but the repercussions are still being felt.

There have been some eyewatering IR35-related fines from HMRC in recent months, with the latest being an £86.5m bill for Defra.

Defra’s off-payroll errors were highlighted in their 2019-2020 Annual Report and Accounts which confirmed HMRC was investigating for the incorrect assessment of IR35 status of a number of contractors though the final bill has only just been made public.

Defra had used HMRC’s own online Check Employment Status for Tax (CEST) tool and its accompanying guidance to determine the status of its contractors. Final liability amounted to £86.5m, including £4m in interest. This follows a similar error by the Department for Work and Pensions (DWP) which cost £87.9m.

Our view

The news highlights the difficulties faced by organisations in properly assessing the IR35 status of workers. We recently wrote an article about CEST looking at why it isn’t the fail-safe assessment tool it should be.

The tool requires the organisation to answer a series of questions about the contract assignment and provides a status determination statement (SDS) based on the answers given.

While HMRC didn’t say “use CEST, and you’re safe”, it stated that it would not override CEST assessments where it was confident that the questions had been answered honestly and in accordance with the spirit of the legislation. This led many organisations to see CEST as either a mandatory obligation or a “get out of jail free” option, with neither being the case.

Now that CEST has been tested in anger, including by the organisation promoting its use, it appears a long way away from the safety net many thought it represented.

With a reputation for its frequent inability to give a conclusive result and the omission of any questions on mutuality of obligation, a key IR35 test, the use of CEST may well have given organisations a false sense of security.

In addition to CEST’s apparent limitations, HMRC’s investigations also seem to point to a lack of appreciation and application of the legislation when using the tool.

Those organisations that have used CEST in the hope of keeping HMRC at bay would be well advised to think again and seek expert advice to review any assessments previously conducted.

Although it’s taken HMRC almost four years to conclude some of its investigations into public sector organisations, these published results are enough to make anyone sit up and think again.

Need help with IR35 compliance?

IR35 compliance is a complex area. Our team of experts is here to help all members of the temporary labour supply chain to act compliantly. Find out about our IR35 services which include our proven employment status assessment tool, IR35 Complete™ which delivers insurable results.

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