DWP accounts highlight decline in outside IR35 workers in wake of department’s £87.9m tax bill

The Department for Work and Pensions (DWP) stands accused of encouraging the proliferation of zero-rights employees working in the public sector, after its latest set of accounts show a marked decline in the number of contractors it’s engaging on an outside IR35 basis since the 2020-21 financial year.

As previously uncovered by Computer Weekly in July 2021, the department’s 2020-21 accounts revealed it paid HM Revenue & Customs (HMRC) £87.9m for historic IR35 compliance errors after it incorrectly assessed the employment status of its contractors over a period of several years.

Its latest set of accounts – covering the 2022-23 financial year – show the number of contractors the department has engaged in total has increased to 3,289 from 1,352 in 2020-21, but the number working on an outside IR35 basis for the department has fallen from 82 to six during this same time period.

Meanwhile, the number of contractors engaged by DWP on an inside IR35 basis now stands at 208, down from 247, as documented in its 2020-2021 accounts.

The remaining 3,075 contractors DWP engaged during the 2022-23 financial year are listed as not needing to have the IR35 legislation applied to them, which suggests these individuals may be providing their services to DWP via a Pay-As-You-Earn (PAYE) umbrella company.

Either way, Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, said the shift in the department’s hiring practices towards individuals working on an outside IR35 basis is cause for concern, as it suggests it’s taking a risk-averse approach to hiring contractors in the wake of its £87.9m tax bill.

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“HMRC has not only saddled the DWP with a tax bill in 2020-21, but its enforcement activity now appears to have cut off DWP’s supply to the best workers,” he said. “This is a classic symptom of the misguided off-payroll reforms, a policy invented and pushed through Parliament by HMRC bureaucrats. It now hangs around the necks of Conservative ministers who should hang their heads in shame for allowing it into the statute books. It’s anti-business and anti-growth.”

The shift away from using outside IR35 contractors also means the department is engaging individuals who will – by default – be working as zero-rights employees, which is the term typically used to describe inside IR35 contractors.

The reason for this is because an inside IR35 contractor is, unlike someone working outside IR35, treated as an employee for tax purposes but is not eligible to receive the same workplace benefits as a permanent employee.

“The DWP are either now misclassifying hundreds of self-employed working people, who have had their right to operate as their own boss taken away from them, or they have deliberately chosen to hire workers who are classified in law as employees, but have instead hired them via limited companies, thereby denying them any employment rights,” he said.

“The ‘middle-way’ rights-loophole of hiring hard-working professionals is ‘zero-rights employment’, and you would expect the Department for Work and Pensions to behave more ethically rather than exploit this hole in the statute.”

Computer Weekly asked DWP for clarity on its approach to hiring contractors, and whether this has been directly affected by HMRC’s enforcement action against it, and received the following statement in response.

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“All DWP contracts are awarded through open and transparent procurement under the Public Contract Regulations and in line with government policies,” a spokesperson for the organisation stated.

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