Despite HMRC’s adamant denial of any evident blanket IR35 determinations in the public sector, almost all contractors working for Network Rail have been classified as inside IR35 according to a Freedom of Information (FOI) request earlier this month.
Is the taxman simply ignorant to the realities of the off-payroll working rules, or is there something more wilful about its dismissal of large-scale wrong determinations?
'No evidence of blanket IR35 determinations’
In response to the investigation carried out by ContractorCalculator, HMRC has stated that it has seen ‘no evidence of blanket IR35 determinations in the public sector.’ The said investigation found that 99% of contractors working for Network Rail were caught by the off-payroll rules - a higher number even than that of the disproportionate BBC and NHS inside-IR35 determinations.
Network Rail disclosed that only 7 out of 817 contractors assessed were not caught by the legislation. This means that 810 contractors working for Network rail have to pay income tax and Nation Insurance (NI), despite still not receiving any employee benefits like sick or holiday pay. This is almost assuredly a result of blanket IR35 determinations.
‘Simply put, Network Rail has found this ludicrous proportion of contractors to be caught by IR35 due to unlawful compliance practices,’ ContractorCalculator CEO Dave Chaplin said. ‘What’s most alarming is that its protocol was agreed following consultation with HMRC.’
Despite these overwhelming numbers, an HMRC spokesperson maintained that the status determinations were valid and lawful. They stated that ‘employment status for tax is determined by the contractual terms and conditions, and the actual working practices of engagement. The off-payroll working rules do not affect the genuinely self-employed, nor do they focus on specific trades or professions.’
Repeat IR35 mistakes across the public sector
The same HMRC spokesperson also defended CEST – HMRC’s Check Employment Status for Tax tool – stating:
‘CEST was rigorously tested against known case law and settled cases. It is accurate and HMRC stands by the result if the tool is used correctly. CEST is not biased towards an employment outcome, giving a self-employed outcome the majority of the time.”
However, this tool has been blamed by public sector chiefs in both the BBC and NHS for vast wrongful determinations. This lawful misapplication of IR35 has seen the number of contractors in the public sector plummet, while those who have been caught by the legislation are facing sizeable tax bills.
BBC heads openly criticised CEST back in January, with Director Lord Hall commenting that ‘from 2017 onwards, [they] were surprised by the way the outcomes of the tests that [they] had been applying perfectly legitimately and properly before were suddenly changed by CEST.’
The BBC has struggled to grasp how to apply HMRC’s tool since they first adopted its use, and financial consequences are now being felt by its freelancers and contractors that could be life-ruining.
Roughly 800 workers so far have been issued backdated tax bills after their employment status was changed by CEST. Many will face bankruptcy in order to pay the phenomenal amounts back.
Lord Hall’s final comment of the meeting was a warning. He said:
‘HMRC should be thinking very hard about the difficulties created by rushing into something which was more global in nature, and which we still haven’t worked through the consequences of now.’
National Rail also used CEST for IR35 determinations
Dave Chaplin also commented on the use of CEST being a common denominator when it comes to wrongful blanket IR35 determinations. He claims that the key to Network Rail’s low IR35 pass rate is almost certainly down to using CEST for assessing the status of each individual role.
In its correspondence with HMRC, Network Rail acknowledges that it has decided to use HMRC’s tool ‘in all cases without exception’, and that ‘the result arising from this would be final with no appeal’. This 2D method of determining a whole workforce’s financial future is legal, but it could be seen as morally careless of the rail infrastructure provider.
A Network Rail spokesperson stated on the subject:
‘Network Rail complies fully with the tax law. The arrangements we have in place for contractors have been developed using the HMRC online CEST tool and are entirely compliant with the requirements of the Intermediaries legislation.’
The IR35 reform shifts the responsibility of determining a worker’s employment status from the worker to the hirer. While there is a penalty for hirers who wrongly determine contractors as outside IR35, no such fine exists for those that wrongly determine them as caught by the legislation. This plays a large part in the current epidemic of blanket inside-IR35 determinations, with no consequences befalling those not taking the time to fairly test workers’ circumstances.
Despite the extensive criticism of CEST and disproportionate amounts of contractors being caught by the legislation, HMRC continues to stand firmly by its tool. Does the taxman refuse to acknowledge any fault with its tool through simple ignorance, or is the revenue stream too rich to give up?
Additional IR35 advice for contractors
If you fail an IR35 test, you can expect to pay around 25% more in tax every year, which would amount to a huge chunk of money absent every month. You also still wouldn’t benefit from employment rights or have a contract of employment with your client, so you could face critical financial issues with no real benefits or protections to speak of. It’s important to take the necessary precautions to avoid this situation.
As a genuine contractor, freelancer or consultant who is in business on your own account, you shouldn’t have anything to worry about. However, it would still be worth having a contract review at the very least; whilst you may know that you’re legitimate, IR35 determinations are notoriously subjective.
Should you want some peace of mind, we offer a full contract review amongst other services to help you prepare for IR35. We’ll give a pass or fail based on the current contract you hold, along with comprehensive comments on how to improve any problem areas.
We also offer IR35 investigation representation from our Head of Tax and resident IR35 expert Andy Vessey ATT should it go to tribunal.
For any further information or advice, please call us on 01163 800 400 or drop us an email.