The Department for Work and Pensions (DWP) are a public sector body that relies on a highly-skilled, flexible workforce – in other words, contractors. However, the government department appears uneducated on the public sector IR35 reform and how to apply the new off-payroll rules, despite it coming into effect back in April 2017. A lengthy email exchange and IR35 communications document outlining how status tests will be carried out have been shared with Larsen Howie; many of the DWP’s actions are vague, and some claims around the CEST tool could prove to be a source of concern for contractors currently engaged by the department.
What exactly is the DWP getting wrong in its approach to IR35, and could current Department contractors be facing a push to PAYE in a ‘risk-averse’ play?
DWP displays little consideration of how IR35 affects the contractor
In the DWP’s IR35 communications, it states that ‘the Department will face reputational damage if IR35 legislation is not consistently and accurately applied…incorrect decisions will mean the Department is accountable for any missing tax and NI contributions.’ That an incorrect decision will also have significant tax implications for the contractor should they be deemed inside isn’t mentioned in the document - in fact, a good portion of the communication reflects a lack of consideration or empathy for the other side.
Any questions from the concerned contractors appear to be met as a challenge throughout the email thread, with the responding DWP official never addressing the points made. One such list of queries that were relevant and reasonable was called ‘OTT’ and a DWP official claimed that the contractor was being ‘a bit unfair on the team’. A full reply from a DWP official on the matter reads:
“The Department’s job here is to make sure it can continue to manage its business through contractors where necessary but also comply with the regulations set out by HMRC. The team are doing their best to ensure assignment managers are fully equipped to make sensible decisions.”
“I don’t think the Department is aiming to push people either in or out of IR35 but to ensure the right decisions are made. If you have concerns, you should be taking this up with your assignment manager (or if there are issues with the tool guidance and process etc perhaps feedback to HMRC).”
In speaking to a current DWP contractor on the subject, they expressed a group feeling that the Department’s determinations are being forced without due or accurate consideration, and that questions are not welcome or satisfactorily resolved.
“I wasn't happy with a number of responses in my determination and didn't get anywhere in challenging them, even though they were clearly inaccurate,” the contractor said. “I will not be [operating via] a limited company but an umbrella, and this engagement hasn't started yet. It is not an extension but a completely new contract with different terms. I asked if the determination would be re-done, but I haven't had confirmation and doubt I will get it.”
DWP lacks education around IR35
Another problem with the DWP’s approach - and one that seems to be an issue throughout the public sector - is a rampant lack of education around the IR35 reform. The proposed plan of action for the off-payroll rules states that a DWP assignment manager ‘must have participated in a 2-hour upskilling session to be able to carry out IR35 Assessments.’ This is nowhere near enough time to fully understand the complex legislation; to then be deemed qualified to apply it to a contractor’s means of income accurately is negligent on the Department’s part.
Another contractor questioned if the DWP plans to review case law and employment tribunals where judges have made IR35 determinations as part of the training and preparation, and voiced concern that "it feels [like] the DWP is relying heavily on 'guidance' from HMRC, as opposed to the legislation and what the judiciary has said". The same contractor further questioned how far the DWP’s responsibility goes, asking: "why is this 'guidance' taking precedence over legislation and case law, when the legislation specifies the end client must take 'reasonable care'?"
To this, a Department official simply replies: “There’s a lot there that’s completely out of the control of civil servants in this department – the interpretation of the legal position is for the civil servants in HMRC to define (which they have done in guidance – which we’re using.”
We went back to our current DWP contractor contact for comment, who once again expressed concern about the DWP’s IR35 approach. “Regarding the guidance they use, which they will not share with us electronically, they just talk through it when justifying answers to the determination,” they said. “I'm not sure if this was provided by HMRC or something created by DWP's ‘Tax Centre of Excellence’. It is highly contentious because the examples used steer the person to the answer, they want rather than reflect the legislation or the truth.”
DWP plans to rely solely on CEST for IR35 status determinations
Perhaps most worrying is the DWP’s intention to solely rely on CEST to make their status determinations. The DWP states in their communication that they plan to ‘[undertake] the assessment using the HMRC CEST Tool and completing the IR35 Assurance Checklist’. The ‘requirement’ for the Department to use CEST is repeated throughout.
Although the long-promised CEST overhaul was unveiled this week and some improvement has been made, the core issues that caused the tool's inaccuracies when determining employment status are still very much present. The new disclaimer from HMRC that any results produced by the tool will be honoured should also be taken with a pinch of salt - the DWP would do well to heed the £4.3m lesson learnt by NHS Digital that the taxman does not always stand by a pledge.
Yet again, a contractor questions the validity of the DWP’s claim, highlighting the proven unreliability and inaccuracy of CEST, as well as the "inherent problems which are well documented, as is the case for the guidance HMRC are also supplying end clients." They also highlight that the use of the CEST tool is entirely optional, reiterating that an end client doesn’t have to use it, and finally asks why, "considering it doesn’t make accurate determinations, the DWP is using [CEST], and not using alternative tools or tax specialists?" The contractor goes as far as to mention the lack of mutuality of obligation in HMRC’s tool being problematic in status determinations.
The DWP official replied with the following:
“The CEST tool is not optional for us, we have to use it. The Dept has engaged with experts on this and also has a team of tax experts who have created the guidance and briefing. At the end of the day, we have to comply with the guidance. We are all finding our way through this and are challenging and highlighting issues, but we do have to go with the instructions we are given. If we don’t, the resource request gets rejected which does not help anyone at all.”
I’m a DWP contractor: what to do if you’re offered an inside IR35 contract
Larsen Howie’s Head of Tax and resident IR35 specialist, ex-HMRC inspector and Jensal Software case defence Andy Vessey ATT talks us though the options available should you be offered an inside-IR35 contract from the DWP.
“DWP’s so-called status assessments are fait accompli. If you accept DWP’s offer of a contract that is ‘inside’ IR35, then your company effectively becomes redundant and you are then wasting money in keeping it ‘live’, unless you intend on using it in the future,” he continues. “However, if the DWP contract was to be your last for whatever reason, then you may wish to consider closing down the company and withdrawing all the assets (which is likely to be cash in the bank) and have it treated as a capital distribution which will be subject to 10% Capital Gains Tax. Just be mindful of the Targeted Anti-Avoidance Rule (TAAR) for distributions on winding up, which basically means you wouldn’t be able to be involved in a business similar to what you are doing now for the following 2 years.”
“You can be an employee of an arm’s length employer, i.e. an agency or Umbrella company in this case. You would, however, need to have a discussion with your accountant first. Alternatively, if the DWP is working with outsourced suppliers in your field of expertise, then you could offer your services via one of these consultancy companies. In this scenario, DWP sub-contracts project work to the outsourced supplier and you may be able to preserve your self-employed status.”
Larsen Howie offers a range of contract and working practices reviews – you can find out which option would be best for you here. We also offer IR35 investigation insurance with representation from our Head of Tax, IR35 specialist and Jensal Software defence Andy Vessey ATT, should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email. Alternatively, take a look around our Knowledge Hub for more IR35 advice, industry news and contractor guides.