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HMRC fine DWP £87 million – confirms IR35 rules are not fit for purpose

If the Government is serious about 'unleashing' Britain's entrepreneurial potential, it needs to make it easier for the self-employed.

In a move which can only be described as Orwellian, the Department for Work & Pensions (DWP) has been fined over £87m in tax, National Insurance Contributions (NIC) and associated penalties by HM Revenue & Customs (HMRC) for their failures regarding the operation of IR35 and withholding taxes for freelance contractors, who have been working through Personal Service Companies (PSCs).

It is almost laughable that one public organisation fines another in this situation – surely the DWP would have consulted with HMRC to get this right. The £87 million fine means the money is going around ‘one big public sector circle’. This really is a case of ‘robbing Peter to pay Paul’. It is difficult to see how this HMRC review and the associated penalties helps improve the efficiency of the public sector and the services which are being provided to the public.

This embarrassing episode now sends a worrying message to the private sector where the IR35 rules were extended to apply from 6 April 2021. An urgent review of the tax rules in this area is needed so they operate effectively and are fit for purpose.

The fact that the DWP can’t correctly apply the IR35 legislation in a number of cases confirms the complexity of this onerous legislation, and the difficulty that many organisations have in assessing whether a freelance contractor is genuinely self-employed.

Since April 2017, all public-sector bodies have been required to review the ‘deemed employment status’ of their freelance contractors – where contractors would have been regarded as employees, if it were not for the existence of a personal service company (or contractor company), the public body would need to operate PAYE and withhold Income Tax and NIC on payments to consultants.

The difficulty of the IR35 rules is compounded by the fact that it is a very subjective set of parameters to determine the correct status of a worker – HMRC’s guidance and its own Employment Status Tool are flawed and do not give the consultant or the contracting party any real confidence in applying the rules correctly.

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