Question marks grow over accuracy of HMRC’s IR35 status service
A recent employment tribunal decision has highlighted critical inaccuracies in HMRC’s online IR35 status checker, CEST, allowing a contractor who was taxed wrongly as an employee to claim circa £9,500 in overcharged tax and National Insurance.
Tony Elbourn worked as a Business Analyst for the Met Office for 5 months at the end of 2017. The end-client determined his IR35 status to be “inside IR35” using CEST, which led to his rate being reduced to take his employer’s National Insurance Contributions into account, and the deduction of PAYE employment tax and NICs at source.
Under the Off-Payroll IR35 rules, the responsibility for determining a contractor’s IR35 status falls with the end-client if they are in the public sector. With many public sector bodies ill-equipped to make such an assessment, HMRC launched the online CEST service to help clients, agencies and taxpayers calculate IR35 statuses using a web-based questionnaire. It has since come under criticism for being overly simple and returning an apparent bias towards “inside IR35” determinations.
Mr Elbourn argues that the Met Office based its assessment on “a boilerplate business analyst job description” and completed CEST without a copy of his contract to hand.
The case is interesting in that, rather than appealing to the tax tribunal in respect of the overpayment of tax, Mr Elbourn appealed to the employment tribunal, a free process, arguing that he did not receive employment rights and was charged his own employer’s National Insurance in the form of a rate reduction. He lost the case, with Judge O’Rourke finding that his engagement did not meet the criteria for employment: “He [Elbourn] was given a project and, apart from a weekly meeting to check on progress, he was his own master”.
Because IR35 uses exactly the same criteria as the employment tribunal, the decision allows Mr Elbourn to conclusively show HMRC that he was in fact self-employed and has overpaid some £9,500 in tax and NICs, including an estimated £3,300 in employer’s National Insurance. Very few contractors who are paid as “deemed employees” under the Off-Payroll rules are actually afforded full employment rights, so taking their engagement to the employment tribunal could constitute a win-win situation in that they either receive employment rights or are determined to be self-employed, with the corresponding tax benefits.
Many contractors were left with sizeable unexpected tax bills at the introduction of the Off-Payroll rules when their public sector contracts that had previously been determined to be outside of IR35 straddled the 6th April 2017 start date of the rules, and were re-classified retrospectively as inside IR35. CEST may have been responsible for a significant amount of those decisions.
The doubts over CEST add to growing uncertainty in general over whether the extension of the Off-Payroll rules to the private sector, currently pencilled in for 6th April 2019, will be too soon and could result in a mess of non-compliance and litigation.
22th October 2018.
Sources:
https://www.contractorcalculator.co.uk/cest_assessment_rejected_judge_545010_news.aspx
https://www.contractorcalculator.co.uk/ir35_summary_responses_payroll_consultation_544510_news.aspx
https://www.contractoruk.com/news/0013749cest_being_right_22_out_24_cases_shows_its_working.html
