Do Contractors inside IR35 have a case to claim Tax Back?

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Following an 11 month investigation into the results of CEST, HMRC have at last revealed that 54% of the IR35 determinations it has provided since April 2017 fall outside the rules. And ultimately, this raises a very important question; why is it still so difficult for contractors to work outside IR35 in the public sector?

Worryingly, there looks to be a huge difference in the number of contractors judged outside IR35 by CEST and those actually placed outside the rules by public sector organisations.

The exact figure of those affected by inaccurate assessments is hard to come by, but given The NHS and The Ministry of Defence (among others) have both made blanket inside IR35 decisions since reform was enforced, the number of contractors wrongly working under IR35 could be huge.

This is supported by data, which suggests 90% of the rigorous assessments carried out in the three months after reform belong outside IR35 . Of course, every working arrangement is unique, but the 36% gulf between CEST’s and these determinations raises serious questions about the reliability of the tool, which, as we now know, HMRC cannot prove to be accurate.

Unfortunately, HMRC’s implementation of public sector changes has defined reform, and these revelations have the potential to open another can of worms. On the face of it, many contractors might have a legitimate case to appeal incorrect IR35 determinations and claim back tax directly from HMRC or through a court or tribunal case.

Granted, the data – which was reluctantly released following an intervention by the Information Commissioner’s Office (ICO) – does not specifically say whether the answers CEST gave were for PSC contractors or sole traders. So, HMRC could centre its defence on the fact that not all of this 54% are contract workers.

However, the technology has been used some 750,000 times since its release, and given the same logic is used for both PSC contractors and sole traders, there’s no denying CEST has been central to many thousands of IR35 decisions. That HMRC have encouraged public sector bodies to use the tool and will almost always stand by the answers it provides, only goes to strengthen this theory.

It’s a surprise the majority of the three quarters of a million cases passed through CEST do not fall under IR35. And in addition to raising new question marks over HMRC’s implementation and policing of reform, these reports shine the spotlight back on public sector bodies’ IR35 strategy.

HMRC’s data, which also reveals CEST has advised over one in three (34%) contractors belong inside IR35 could also be wide of the mark, particularly when you take into account workers’ true experience of public sector reform.

There’s also the important matter of the 15% of cases where CEST could not provide an answer. Having been used 750,000 times and counting (according to Monday’s Public Accounts Committee Meeting) the tool has failed to determine IR35 status over 100,000 times. If this doesn’t flag up its failings, what does?

It remains to be seen what the final decision of these apparently unanswerable cases were, but you can only imagine that an inexperienced public sector engager would be inclined to place the contractor inside IR35.

More so, the likelihood of HMRC challenging an inside IR35 determination pales in comparison to the chances of the taxman investigating an outside assessment. So, naturally, public sector bodies have taken what they consider to be a risk-averse approach.

So, can we go as far to claim that public sector reform has actually led to higher levels of non-compliance? Perhaps. Certainly, HMRC’s handling of changes has muddied the already murky waters of IR35

That CEST statistics do not seem to reflect the stark reality of the situation is yet another indicator (assuming HMRC needs one) that extending IR35 reform to the private sector could be a recipe for disaster.

Although manageable in time, private sector changes – if introduced as early as next year – would only make matters worse – and not just for contractors and engagers either. Such is the apparent level of non-compliance in the public sector currently, HMRC would be shooting themselves in the foot by rolling out private sector reform as early as next year.

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