HMRC refutes ‘blanket’ IR35 determinations at Network Rail

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Train leaves Paddington railway station in London, UK, panorama

HMRC refutes ‘blanket’ IR35 determinations at Network Rail

HMRC has said it has seen no evidence of “blanket” IR35 determinations in the public sector, following revelations this week that Network Rail has assessed 99% of its contractors as “inside IR35”.

ContractorCalculator.co.uk reported on Wednesday that a Freedom of Information request had revealed that 810 of 817 contractors at Network Rail had been put onto PAYE, sparking accusations of a “blanket” approach to IR35 assessments at the public company.

Public Sector Bodies (PSBs) were made responsible for assessing their contractors’ employment statuses after the introduction of IR35 reforms known as “Off-Payroll” to the public sector in 2017.  The Off-Payroll rules require any IR35-caught contractors to have PAYE employment taxes deducted at source from their invoices.

Like individual contractors before them, many PSBs have struggled with making the complex determinations – with the added complication of having to make them en masse, leading to concerns within the industry that PSBs may be tempted to either take a “blanket” approach: making one detailed assessment and then applying the decision to all contracts with comparable terms and conditions – or avoid their obligations altogether by simply categorising all contractors as “inside IR35”.

In their quarterly IR35 forum in November, HMRC said classifying all workers as inside IR35 is “not in line with the legislation, and HMRC has been clear that public bodies should not do this”.

However, they also acknowledged that Off-Payroll may nudge engagers towards taking a “blanket”, or role-based, approach in their assessments, and appeared to condone the practice in certain situations: “having reviewed one contract, an engager may consider that identical facts and terms and conditions apply to other contracts, and it is then not necessary to review every individual engagement separately”, adding that such an approach should be clearly minuted “to enable [engagers] to rebut future allegations”.

ContractorCalculator.co.uk claims the 99% inside-IR35 figure at Network Rail is a result of an “unlawful role-based blanket approach” agreed upon with HMRC, with assessments being conducted using HMRC’s flawed Check Employment Status for Tax (CEST) tool.

“Simply put, Network Rail has found this ludicrous proportion of contractors to be caught by IR35 due to unlawful compliance practices,” ContractorCalculator.co.uk CEO Dave Chaplin said. “What’s most alarming is that its protocol was agreed following consultation with HMRC.”

An HMRC spokesperson subsequently told Recruiter magazine it has seen no evidence of blanket determinations in the public sector, adding: “HMRC does not comment on identifiable customers.  Employment status for tax is determined by the contractual terms and conditions, and the actual working practices of an engagement.  The Off-Payroll working rules do not affect the genuinely self-employed, nor do they focus on specific trades or professions.

“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, giving a self-employed outcome the majority of the time.”

ContractorCalculator.co.uk has been vocal in its criticism of HMRC’s CEST tool, claiming CEST returned a woeful accuracy rate of 58% after a review conducted by the contracting website in conjunction with expert employment status lawyers that compared 24 employment status tribunal decisions against CEST’s results for the same data.  The website has also cited a case of a Met Office contractor who had his employed status – determined by CEST – overturned in court, and has co-authored a whitepaper on the tool called “CEST: not fit for purpose”.

In a separate FoI request, the website also saw correspondence between Network Rail and HMRC which updated the Revenue on the Rail company’s compliance practices following the implementation of Off-Payroll in April 2017.

In the correspondence, ContractorCalculator.co.uk claims Network Rail details a ‘strawman process of determination of status’, which it acknowledges was agreed upon following discussions with HMRC.

“Within this area of contingent workforce, generic roles that would be covered were identified and categorised. The role itself was given a determination using the online tool and this determination was to be applied to whoever carried out such a role for the company.

“It’s unacceptable that HMRC has encouraged role-based assessments, which defy the legislation, let alone acknowledge that it’s a strawman process, which will have resulted in so many contractors being overtaxed,” Chaplin continues.

“This approach will also be putting a strain on Network Rail, for whom the cost of hiring each ‘deemed employee’ who previously operated outside of IR35 will have increased significantly increased in order to retain them.”

Chaplin claims the extremely low outside-IR35 pass rate at Network Rail is largely due to its reliance on CEST for assessing the status of each individual role.  In its correspondence with HMRC, according to Chaplin, Network Rail confirmed that it had decided to use HMRC’s tool “in all cases without exception”, and that “the result arising from this would be final with no appeal”.

Freelancing industry body IPSE called the revelations “deeply concerning”.  Andy Chamberlain, IPSE’s Deputy Director of Policy, commented: “Network Rail’s assessment that 99% of its contractors are caught by the off-payroll rules is deeply concerning.  These people will now have to pay tax like employees – without any of the rights.

“The preposterously high ratio raises serious questions about how the assessments have been made. Network Rail has openly admitted roles were grouped together and blanket assessed, which undermines Treasury claims that this has not happened.

“The news also raises serious questions about the Network Rail’s employment practices. If it has 810 individuals who are treated like employees, they should be employees.

“To run the railways that the country relies on, Network Rail need the flexibility that specialist contractors offer. Instead, however, they have been strong-armed into assessing them as ‘employed for tax purposes’ through a mixture of direct pressure from HMRC, a fundamentally flawed CEST tool, and an incomprehensible set of rules on tax status.

“In the NHS, the disastrous changes to IR35 caused chaos and drove many skilled contractors to leave. We could now see a similar situation here. And this is only a taste of things to come when these rule changes are extended to the much larger private sector next year.

“Ultimately, the off-payroll rules are so unclear even HMRC doesn’t understand them, as evidenced by its utterly atrocious record at recent tribunals. Treasury Ministers urgently need to pause and listen, rather than deciding on a policy then consulting.”

In response to ContractorCalculator.co.uk’s claims, a Network Rail spokesperson told Recruiter magazine: “Network Rail complies fully with the tax law. The arrangements we have in place for contractors have been developed using the HMRC online CEST tool and are entirely compliant with the requirements of the Intermediaries legislation.”

The Off-Payroll rules are due to be rolled-out to the private sector in April next year.

3rd May 2019