IR35: Thousands of contractors have been wrongly taxed
New information indicates that public sector bodies are ignoring the results of the HMRC tool (CEST), and may have deducted incorrect amounts of tax and NI from contractors.
It has been over a year since the off-payroll working (IR35) rules were introduced for public sector contracts, and there are still enormous problems with the implementation of these rules.
In contrast to IR35 for private sector contracts, where the contractor decides whether their contract is within IR35, the public sector body (PSB), the ultimate customer for the contractor, must decide whether the contractor should be subject to the IR35 rules for that particular contract.
If the worker does fall within IR35, the fee-paying organisation in the chain (usually the employment agency) is responsible for deducting and paying over PAYE from payments made to the worker’s personal service company (PSC).
Some PSBs have also deducted employers’ secondary class 1 NI from the contractors’ invoices which is incorrect (under Social Security Contributions (Intermediaries) regulations (SI 2000/727)).
How to decide?
HMRC advises public sector bodies to use the check employment status for tax (CEST) tool to reach a conclusion on the IR35 status of the worker.
HMRC said it will stand by the results of the CEST test, as long as accurate information was used to provide answers to the questions the tool poses. However, the PSB is not obliged to follow the results of the CEST test.
Is CEST used?
A freedom of information (FOI) request submitted by ContractorCalculator revealed that the CEST tool was used 576,490 times between March and October 2017. This was the peak demand for the tool as the revised IR35 rules for the public sector came into effect on 6 April 2017.
In later months, the CEST tool has been used roughly 40,000 times per month. This high activity level indicates that the CEST is being used by PSBs, but are they paying attention to the results?
The same FOI request also uncovered statistics for the results of the CEST tool: 31% of contracts tested resulted in “within IR35”, 54% of the contracts were found to be outside IR35, and in 15% of cases the CEST tool could not provide a definite answer.
Dave Chaplin, CEO and founder of ContractorCalculator, believes the CEST results are in line with his experience that roughly 30% of contracts used by IT contractors fall squarely with IR35.
HMRC has also always claimed that the CEST tool will provide an answer in 85% of cases, so the tool appears to be performing in line with expectations.
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“Despite CEST’s advice, many hirers have been taxing contractors as employees,” said Chaplin. “We know that blanket assessments have been imposed within the NHS and the Ministry of Defence (MoD), as well as on other key public sector projects.”
Chaplin said the logical conclusion is that the PSBs are using the CEST tool, but they are ignoring the results in many cases.
Why is CEST result ignored?
The shortcomings of the CEST tool are well known. Mark Taylor of Chartergates Legal Services test-drove the tool in March 2017 and found that it appears to ignore the core principle of mutuality of obligation, and thus would struggle to determine borderline cases. This conclusion is supported by analysis of the inner workings of the tool undertaken by ContractorCalculator.
“We have published evidence proving CEST provides incorrect answers and is not fit for purpose,” commented Chaplin. “This creates a risk for hirers and agencies. Receiving a pass from CEST is the equivalent to being presented with a dodgy MOT certificate. In light of this, it isn’t too surprising that so many hirers have taken the supposedly risk-averse option. They simply do not trust CEST’s results.”
What can contractors do?
As Bhavina Carsane of Chartergates concluded in July 2017, there is no route for a contractor to appeal a ruling on an IR35 decision made by its PSB client.
The fee-payer, or the party which has the direct contract with the PSB, can ask the PSB for written details of its reasoning concerning the IR35 status decision, but the contractor does not have that right.
However, Chaplin believes that some contractors could mount a legal challenge in the County Courts against their agency for misrepresentation, or alternative challenge their treatment at an employment tribunal.
Consulting tax editor for Accountingweb.co.uk. I also edit Bloomsbury's Tax Rates and Tables and write newsletters for other publishers.