HMRC have released figures on the back of an 11 month Investigation by Contractor Calculator into HMRC’s Check Employment Status for Tax (CEST) tool. The figures suggest that thousands of contractors could have grounds to appeal against wrongful tax treatment, resulting from unlawful blanket assessments conducted by public sector hirers.
HMRC had blocked a series of Freedom of Information (FOI) requests from ContractorCalculator, which sought statistics detailing the results issued by CEST, an appeal resulting in an eventual intervention from the Information Commissioner’s Office (ICO) has finally yielded the requested data.
54% of assessments conducted by CEST have determined that IR35 does not apply to the contract. Blanket assessments conducted by many public sector bodies (PSBs) have resulted in thousands of contractors being over taxed.
Ø Thousands of contractors are being overtaxed due to unlawful blanket assessments
Ø Hirers are now at risk of costly legal challenges for unlawful deductions of tax
Ø Findings prove neither reforms nor CEST are ready for private sector rollout.
These results were published following the Institute of Chartered Accountants in England and Wales (ICAEW) writing to the Financial Secretary to the Treasury, advising that CEST is not suitable for use in the private sector.
HMRC figures highlight public sector IR35 non-compliance issue
The figures provided by HMRC shows that, while 54% of assessments indicate that IR35 does not apply to the contract, roughly 31% suggest that IR35 applies, with 15% proving inconclusive.
HMRC claims not to hold statistics specific to limited company contractors, with the figures provided combining results returned to limited company contractors and sole traders on their deemed employment status.
Is HMRC encouraging non-compliance with IR35?
Despite repeatedly stating throughout the development of CEST that it would stand by the assessments delivered by the tool, HMRC made a U-turn upon its release. Online guidance accompanying CEST states two circumstances in which the taxman may challenge the tool’s decision. These are:
- When Information provided to HMRC is inaccurate.
- Where HMRC believes that the arrangement is contrived.
Why aren’t hirers standing by CEST assessments?
Mainly the risk of receiving a challenge from HMRC but the various shortfalls of CEST are fuelling further uncertainty among hirers and agencies. ContractorCalculator conducted a comprehensive evaluation of CEST, highlighting some key flaws.
Notably, half of the passes issued by CEST are based on the user passing the substitution test alone, with no further analysis conducted. Given the rarity of an actual substitution taking place, this is dubious; especially when you consider that, in the most recent IR35 case – MDCM Ltd v Revenue & Customs – the tribunal dismissed the contractual right to substitution.
‘’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.”
Public sector contractors prepared to litigate
Although hirers and agencies may perceive the adoption of blanket IR35 assessments to be a low-risk strategy, the release of these figures has served to underline the strength of the legal position in which affected contractors now find themselves.
While there is currently no known appeals process via HMRC for individuals looking to contest their IR35 status decision in the public sector, contractors are well within their rights to litigate. Another potential route is to claim unlawful deductions from wages through the employment tribunals.
The irony is that the accumulative costs of mounting a legal defence, and the tax liability in the event of a tribunal loss, will likely far exceed any initial savings made by hirers and agencies who have flaunted their responsibilities.
IR35 and CEST – not fit for private sector rollout
HMRC maintains that the reforms have helped improve compliance with IR35. However, if CEST’s assessment figures are anything to go by, the taxman’s increased tax yield is merely a result of rising non-compliance – this time among hirers and agencies.
“ContractorCalculator is in possession of a great deal of evidence demonstrating occasions where contractors have received CEST assessments deeming them to be outside of IR35, yet the PSB has refused to allow them to operate outside IR35. This even includes contractors who have actually substituted during their contracts,”
“Some of these decisions were project-wide and on major infrastructure projects. We have seen documentation stating that contractors would be considered caught by IR35 by default, and that employer’s NI will be deducted from their agreed rates. This is unlawful. Employer’s NI is supposed to be paid on top of the agreed rates and by the “deemed employer”.