The latest case of a contractor vs HMRC has highlighted some of the flaws around the concept of IR35 enforcement.

As we reported last week, construction contractor Mark Daniels, who operated under the name MDCM, recently won his appeal against HMRC for a contract covering tax years 2012/13 to 2013/14.

The case isn’t without controversy. Factors that many feel should mean that IR35 was applicable were viewed differently by the tribunal handling the case.

Though the ruling was ultimately in favour of the contractor, it does raise some questions. IR35 has always been a bit of a grey area, but just how grey is it?

IPSE’s Deputy Director of Policy and Public Affairs Andrew Chamberlain has raised an interesting point. In the fallout from the ruling, he asks if HMRC can’t get it right, how can others be expected to?

“HMRC looked at the relevant factors and decided that IR35 should apply,” he said. “The Tribunal looked at those same factors and decided that it shouldn’t. If HMRC cannot semingly make a correct determination, how are public authorities and individual businesses supposed to get it right?”

This last point is particularly relevant with the recent reforms around IR35 in the public sector. There is also much anxiety about the possibility of this being extended to the private sector.

As it stands, public sector organisations must rule whether a contractor they engage is inside or outside IR35. That decision has a massive effect on the contractor. But rather than employing experts to make this decision, the buck is with these public sector organisations to make a correct ruling. This is despite a potential lack of knowledge in the area.

You may think public sector organisations could read about IR35 and make decisions accordingly. But firstly, that will stretch resources. And secondly, if HMRC can’t get their own house in order when it comes to IR35, what chance does a public sector organisation with little to no IR35 experience have?

Questions raised about CEST?

Chamberlain also raised questions about HMRC’s CEST tool.

“It would be very interesting to know whether HMRC had put this engagement through its own tool?” he said. “If they did, and it came back as ‘employed for taxation purposes’, then this would raise serious questions about the tool’s integrity. This is why IPSE has said the criticisms of the CEST tool are accurate: that it cannot be relied upon to make correct determinations which is why many organisations feel forced to take a blanket approach – pushing all off-payroll engagements into IR35 unfairly.”

Though it seems likely HMRC will appeal the MDCM ruling, the case has undoubtedly highlighted some of the flaws within the IR35 system at present.

HMRC must surely be questioning what needs to be done to make things better. Initial attempts to do this, such as the CEST tool, are getting lambasted left, right and centre however.

Chamberlain added: “If the government extends the ill-judged IR35 changes it made to the public sector last year to the private sector, the chaos and uncertainty is only going to intensify.”

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