It has recently been reported by Contractor Calculator that a contractor providing business analysis related services to the Met office in 2017/18 has been able to successfully claim for unlawful deductions of tax and NI from his income.
It appears that under the public sector guidelines introduced in April 2017, Tony Elbourn was found to fall inside IR35 following completion of the CEST tool in relation to Mr Elbourn's services provided to the Met office; it was this decision which led Mr Elbourn to claim for unlawful deduction of income by Qualserve Consulting Ltd, who it was understood to be the fee-payer to Mr Elbourn.
The ‘Check Employment Status for Tax’ tool, known as CEST, is an online tool created by HMRC that presents a series of questions to help determine the employment status of a contractor for tax purposes. The tool came into action when public sector reform changes took place, and was used to assist public sector businesses in determining the IR35 status of a contractor under the new rules.
The tool has received several criticisms since its inception, such as using a lack of key status tests which IR35 is based on, rather going with HMRC’s own interpretation of the legislation. We have urged HMRC to re-evaluate the tool due to many contractors being wrongly placed inside IR35, which despite promoting it as a success, they have promised to do prior to further reform.
Despite the CEST determination, the Judge in the Tribunal found Mr Elbourn to be genuinely self-employed, meaning that the tax and NI deducted from Mr Elbourn’s income would have to be repaid to him. Had he been determined to be an employee, Mr Elbourn would still have been able to claim back employer’s NIC as an unlawful deduction.
This ruling does nothing to help HMRC, suggesting that there are grounds for the heavily criticised CEST tool, which in this case has fallen at the first hurdle; and could mean that the Tribunals will now have their work cut out for them with many other contractors submitting appeals for unlawful deductions of income.
Additionally, if contractors do decide to submit appeals to Tribunal, the £550m which HMRC claim to have been remitted in additional tax (as a result of IR35 reform) could be considerably less, in having to pay back the tax for hundreds of other disgruntled contractors.
The decision also comes at a time when HMRC have had very little success with Tribunal cases. Out of the recent spate of cases, HMRC have successfully defended only one, clearly demonstrating that something may be amiss in HMRC’s strategy for determining employment status. Despite HMRC’s protestations that IR35 reform has been success, this and many other recent tribunal cases tell a completely different story.
Following the Autumn Budget, it has been announced that further IR35 reform to the private sector will go ahead, although this will be delayed until April 2020 and only affect large and medium-sized businesses. This gives businesses and contractors time to adjust in order to be compliant and prepare for the changes.
Mr Elbourn’s case shows that despite the failings of IR35 reform, it is possible to overturn a decision in the courts. We hope this will force HMRC to address the issues with CEST in being used for determining IR35 status and accept that it is not fit-for-purpose .
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