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NHS Digital confirms final settlement of £3.95m with HMRC following conclusion of IR35 investigation

The health service’s digital arm has paid HMRC £3.95m in unpaid tax to cover the cost of its IR35 compliance errors

NHS Digital has paid £3.95m in unpaid tax to HM Revenue & Customs (HMRC), following the completion of a long-running investigation into how the digital arm of the health service had applied the IR35 rules.

The payment is to cover the cost of errors made in how NHS Digital assessed the IR35 status of the contractors it engaged between April 2017 and March 2022.

For context, 6 April 2017 was the date when public sector organisations assumed responsibility for determining whether the contractors they engage with should be taxed in the same way as permanent, salaried employees (inside IR35) or off-payroll workers (outside IR35), based on the work they do and how it is performed.

Before then, it was up to the contractors themselves to declare whether or not their engagements were inside IR35.

An inside-IR35 determination means contractors are expected to pay the same income tax and national insurance contributions as a permanent employee, but are not entitled to receive the same workplace benefits that a salaried worker would.

HMRC also issued NHS Digital with a further £552,000 penalty, which Computer Weekly understands has been suspended for three months and will not be payable if the organisation meets a series of compliance measures laid down by HMRC.

In a statement to Computer Weekly, a spokesperson for NHS Digital said: “We have worked with HMRC to put in place appropriate processes and procedures to meet our obligations in relation to the taxation of contractors.”

They added: “HMRC has now completed its review into the way in which we apply the IR35 regulations and is satisfied that we are able to fully comply with the regulations in the future.”

Read more about public sector enforcement of IR35

News of the final settlement follows the publication of NHS Digital’s 2021-2022 annual report and accounts on 8 November 2022. The document confirmed – following the completion of HMRC’s review in June 2022 – that no further IR35-related liabilities will be forthcoming for the organisation.

The report stated that, between April 2021 and March 2022, NHS Digital engaged 758 contractors, who were all considered to be inside IR35.

It also further confirmed that NHS Digital’s temporary labour costs increased from £46.7m to £96.5m during the 2020-2021 financial year, as the organisation sought to bring in additional “specialist resources” to aid the “development and delivery” of Covid-19-related programmes, as well as its broader digital transformation activities.

The news that NHS Digital was having its implementation of the IR35 rules scrutinised by HMRC came to light in November 2019, following the publication of its 2017-2018 accounts. At the time, it was reported that the organisation was facing up to the prospect of needing to pay a total of £4.3m in unpaid tax and penalties to HMRC.

As reported by Computer Weekly at the time, the organisation publicly stated that it was considering appealing against the ruling, but ultimately decided against doing so.

It was also revealed at this time that NHS Digital had used HMRC’s Check Employment Status for Tax (CEST) tool to assess the status of its contractors, but from January 2019 onwards had begun supplementing its use with the help of an external provider to give “additional assurance”.

Tax reclaim

Dave Chaplin, CEO of tax compliance firm IR35 Shield, told Computer Weekly that any contractors who were engaged on an outside-IR35 basis by NHS Digital and then had their working arrangements reclassified as inside IR35 are entitled to reclaim any tax they previously paid.

This is because, when working out how much tax any non-compliant public sector bodies owes, HMRC is reportedly failing to take into account the corporation tax or dividend tax contractors will have previously paid out while engaged by these organisations, which they are well within their rights to claim back.

This situation has been dubbed the “offsets issue” by contracting market stakeholders, and theoretically means, said Chaplin, that there is no financial gain to be had for the Treasury when HMRC issues sizeable tax bills to public sector organisations.

“All those contractors who were paid on an outside-IR35 basis will be able to reclaim any tax they paid fully,” he said. “The consequence is a circa £3.5m tax loss to the Treasury.

“Unless a fix to this ‘offsets’ issue appears in statute via the forthcoming Finance Bill, we can expect the tax ambulance chasers to start revving their engines.”

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