After an 11-month investigation by freelancer website ContractorCalculator, HM Revenue & Customs have released figures suggesting that thousands of contractors could have grounds to appeal against wrongful tax treatment. This is a result of unlawful blanket assessments conducted by public sector hirers.
A series of Freedom of Information requests from ContractorCalculator - which sought statistics detailing the results issued by the Check Employment Status for Tax (CEST) tool - were consistently blocked by HMRC, but an appeal which resulted in an intervention from the Information Commissioner’s Office finally provided the data requested.
HMRC have been accused of acting in a manner ‘akin to climate change denial’ in its defence of its Check Employment Status for Tax (CEST) tool.
Dave Chaplin - Director of the Stop the Off-Payroll Tax campaign and Chief Executive of ContractorCalculator - wrote an open letter citing ‘widespread and indisputable’ evidence of the shortcomings of CEST which he said HMRC ‘brazenly refused to acknowledge, let alone attempted to address’.
He stated:
“Our investigative work has unearthed a wealth of evidence exposing CEST’s inaccuracies and the unfair outcomes of the assessments, namely widespread false employment. To date, the taxman has repeatedly claimed CEST is accurate, despite widespread criticism of the tool and evidence suggesting otherwise. HMRC’s tin-eared stance on the matter is unacceptable and we are hoping that this open letter will prompt some answers.”
When carried out across a number of public sector organisations, the data requested disclosed CEST assessments showing nearly unanimous inside IR35 results. Nearly 4,000 CEST assessments were inspected and 94 per cent were found to fall within IR35, meaning that for tax purposes contractors are treated as employees.
Private sector companies will be responsible for determining the IR35 status of their contractors from April 2020.
Dave Chaplin has argued that the recent tax tribunal victories for Lorraine Kelly and Kaye Adams have shown up the shortcomings of CEST and that until CEST is changed, a private sector roll-out of the off-payroll rules should not even be considered an option.
He wrote:
‘How is the public expected to trust the output of a tool which has been shown to return the wrong outcome in the most straightforward of employment status cases? - or a tool developed by a government body which has only outright won one of its last 12 IR35 tribunal cases?’
He added:
“HMRC has had two years to provide us with evidence to support its claims that CEST has been rigorously tested and is accurate. Until CEST is fixed and the high risk of contractors being subjected to false ‘inside IR35’ assessments is negated, a private sector roll-out of the off-payroll rules shouldn’t even be considered as an option.”
HMRC said in a statement:
“CEST was rigorously tested against known case law and settled cases. It is accurate, and HMRC stands by the result if the tool is used correctly. CEST is not biased towards an employment outcome and in the last 12 months over 50% of determinations it has provided have been for self-employment or outside the off-payroll rules – this is in line with our expectations for the service. HMRC estimates only about a third of individuals working through their own company fall within the rules and should be taxed as employees. However, numbers will vary greatly between roles and sectors.”
In the public sector, at present there is no known HMRC appeals process for persons wishing to contest their IR35 status decision. However, litigation or claiming unlawful deductions from wages through employment tribunals are possible routes to follow.
Martyn Valentine - Director of The Law Place - said:
“A large portion of contractors have been wrongly assessed as caught by IR35, forced into false employment, and consequently wrongly and overtaxed. They can litigate against the client and/or agency for unlawful deductions of tax. Even some contractors who are genuinely caught inside IR35 could successfully bring action. We know of numerous instances where public sector bodies have deducted their own tax burdens, including employer’s National Insurance (NI), from the rates agreed with contractors. Provided expert legal advice is obtained, the affected contractors can reclaim what is rightfully theirs.”
