A judge has ruled that IR35 was wrongly applied to a contractor engagement.

Tony Elbourn appealed to a tax tribunal for unlawful deduction of wages, when he was engaged through agency Qualserve Consulting to work on a project for the Met Office.

According to reports, HMRC’s Check Employment Status For Tax (CEST) found his engagement to be inside IR35. But Elbourn appealed this decision, on the basis that employer’s National Insurance contributions should not have been deducted.

At a tribunal last week, Elbourn was found to be neither an employee, nor a worker.  Instead, he was found to be self-employed, meaning that IR35 could not have applied to the engagement.

The result means that Elbourn is able to legally prove that an estimated £9,500 has been incorrectly deducted from his income. This is an amount that the Met Office and Qualserve must now repay.

CEST under fire

Experts and industry bodies have long argued that CEST tool is not fit for purpose. The tool asks a series of questions to determine a contractor’s employment status on specific engagements for tax purposes. Many say it ignores critical parts of case law and therefore comes to incorrect conclusions.

“It’s deeply flawed and we have always felt that it’s only a matter of time before a judge disagrees with a CEST determination,” Andy Chamberlain, deputy director of Policy and External Affairs at the Association of Independent Professionals and the Self Employed, said.

While Elbourn lost his appeal, the ruling leaves behind a glaring question. If the tribunal, having considered the working practices of this engagement, decided Elbourn was self-employed, why was he ever deemed inside IR35 in the first place?

Unclear policies

“There are those who will say that tax status and employment status are separate, and they would be right – technically it’s possible that Mr Elbourn could be employed for tax, and self-employed for employment status – but it’s very hard to argue how that can be logically consistent, especially when the tests for both tax and employment status are essentially the same,” Chamberlain said.

Responding to the case, an HMRC spokesperson said: “There is no direct link between employment taxes and employment rights. The government has recently consulted on the rules that determine employment status for both tax and employment rights. This consultation explored the case for aligning the two systems more closely. The government will respond in due course.”

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