The Department for Environment, Food and Rural Affairs (DEFRA) has been fined £86.5 million for IR35 non-compliance with HMRC.

DEFRA are the latest government department to be fined, despite having used HMRC’s own Check Employment Status for Tax (CEST) tool. The news is another blow to the credibility of the tool, but what’s the alternative to CEST?

The DEFRA tax bill is higher than expected and raises further concerns about the accuracy of CEST

The Government Department for Environment, Food & Rural Affairs (Defra) has paid a total of £86.5m in backdated taxes to HMRC, after a lengthy investigation into historic cases of IR35 non-compliance. 

Defra was found to have been non-compliant between April 2017 – the year that IR35 reform was implemented in the public sector – and March 2022.

The total tax bill for non-compliance equates to around £16m annually for five years, excluding the £4m interest due. The sum is higher than the £63.2m that the department expected to receive, which it set out in its annual accounts for 2021/22. 

In the Defra case, non-compliance was primarily due to the use of the Check Employment Status for Tax (CEST) tool, which the body relied on when determining the IR35 status of contractors.

Other government departments – including the Ministry of Justice and the Department for Work and Pensions (DWP) – have also been subject to investigations for IR35 non-compliance. The IR35 bills issued to government departments collectively amount to more than £250m. 

Defra case confirms CEST is not fit for purpose

The news is another blow to the credibility of HMRC’s CEST tool, which was under the spotlight in a review by the Public Accounts Committee (PAC) earlier this year.

Highlighting issues with the tool, the review found that:

“Some questions within CEST were difficult to interpret correctly, and the guidance was long, too general in scope and not integrated into CEST itself”.

The review also questioned the extent of non-compliance across central government, “considering government departments should be in a good place to understand the rules and communicate with HMRC”. 

What’s the alternative to CEST?

We understand that you may have used CEST to make your own assessments under The Off-Payroll Working rules and might be worried about their accuracy. The DEFRA case demonstrates that IR35 rules are extremely difficult to comply with. You may be considering an alternative assessment tool to offer a more robust approach or ways to insure against the risk of an HMRC challenge.

At Morson, our team of experts, with a combined 40 years of experience, have supported private and public sector organisations to comply with IR35 legislation since it was introduced in 2000.

The Morson IR35 MOT

It is crucial that end clients understand their full end-to-end contingent labour supply chain including how their LTD and PAYE direct and PAYE umbrella workers are engaged and paid on an ongoing basis. Our IR35 MOT service supports organisations that are uncertain as to whether their IR35 determinations are correct to avoid financial and reputational risks associated with not meeting IR35 regulations.

• A review of tools used during determinations of incumbent contractors

• A review of existing SDS determinations

• A review of users’ BAU processes

• Agency Worker Regulations considerations

• Analysis of policies and procedures to identify any outstanding risks and potential for improvements to operations

• Use of Morson’s market intelligence tools and approved PSL of suppliers who are all FCSA accredited or professional passport approved

Our IR35 MOT service ensures contractors have been assessed individually and is fully insurable against the outcome using tools which are reviewed by employment law experts, not just algorithms like alternative tools available such as CEST.

Whether your contractor workforce is vast or tiny, we want to help clients avoid the potential mistakes that might be incurred by business’ individual practices, and offer them total confidence that despite IR35, there won’t be any hurdles in being able to access and utilise contingent labour.

If you are concerned about your IR35 systems or processes we’re on hand to help. Get in touch with James Millward, head of integrated services for more information james.millward@morson.com