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How contractors can reclaim their tax for a wrongful IR35 assessment

Public-sector contractors who have overpaid tax as of a result the IR35 reform may find it easier than they thought to reclaim what’s rightfully theirs. Due to widespread non-compliance with the Off-Payroll Working rules among public authorities, many contractors have had unfair and unlawful deductions made from their contract earnings.

However, working in tandem with tax experts and specialist lawyers, ContractorCalculator has devised a solution whereby contingent workers can promptly claim back their lost earnings. IR35 Shield’s Tax Reclaim solution supports claims made for monies owed due to:

  • Blanket assessments: for contractors who have had their IR35 status determined without an assessment
  • Wrong tax and unlawful deductions: including employer’s National Insurance (NI), pension payments and the Apprenticeship Levy
  • Holiday pay deductions: for holiday accrued but not paid out or paid out at the wrong percentage.

In addition to failing to comply with the Off-Payroll rules, some of the above deductions are in breach of the Conduct of Employment Agencies and Employment Businesses Regulations 2003, as well as the SocialSecurity Contributions and Benefits Act 1992.

Our team can pursue the necessary claims on your behalf, which may be filed against the hirer, agency, umbrella company or HMRC, depending on your individual circumstances. Whether a claim needs to be processed via HMRC, through the county courts, or at an employment tribunal, Tax Reclaim can help.

Off-Payroll rules: am I eligible for a tax reclaim?

Your eligibility depends on whether you have had unlawful deductions made from your contracting earnings by a third party. Tax Reclaim isn’t currently applicable to contractors in the private sector as their tax affairs are governed by IR35, and not the Off-Payroll rules.

Though many are unable to distinguish between IR35 and the Off-Payroll rules, there are subtle differences; notably concerning the tax treatment of contractors. When a contractor is caught by IR35, they are liable for employer’s NI in addition to income tax and employee’s NI. This is in part due to the fact that when IR35 was introduced in 2000, the tax regime was more favourable towards limited company contractors.

However, following increases to dividend taxation, there is more parity between the amount of tax paid by contractors and employees. This has been partly acknowledged by the Off-Payroll rules, which require that the party hiring a contractor within the scope of the rules pays the employer’s NI on top of the rate paid to the contractor.

“Unfortunately,” says Carolyn Walsh, an ex-tax inspector who is working with ContractorCalculator to process the claims, “ this is rarely how things have worked out in practice. Many contractors have had employer’s NI, among other taxes, deducted from their rate. Others have been judged to be ‘deemed employees’ by their hirers without receiving an IR35 assessment.”

“As a result, “ says Carolyn, “there are believed to be hundreds of thousands of pounds in overpaid tax in the public sector waiting to be reclaimed. And we are ready to help those contractors reclaim the money they are owed.”

Overpaid tax due to Off-Payroll rules: who is to blame?

In many cases, it would be fair to point the finger at the party responsible for making the deductions. However, a lot of the time, the party in question has simply misinterpreted the law.

Because the Off-Payroll rules have been billed as reforms to IR35, many organisations have assumed the responsibility for processing and deducting tax from contractor income, under the assumption that they are to continue to apply the IR35 rules. But Off-Payroll and IR35 are two separate items of legislation.

IR35 is set out in chapter 8 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), whereas the Off-Payroll rules were introduced within chapter 10 of the updated ITEPA in April 2017. Martyn Valentine, director of The Law Place, explains what the significance of chapter 10 is with regards to tax liability:

“Where the Off-Payroll rules are judged to apply, the ‘fee payer’ is responsible for making a ‘deemed direct payment’ to the worker, which is to be treated as earnings from employment. The fee payer is defined as the party in the contractual chain immediately above the lowest – the lowest being the intermediary that the contractor is directly engaged with, such as their limited company.

“Because the payment is to be treated as earnings from employment, the fee payer is responsible for paying employer’s NI, as they would do on the earnings of an employee. Failure to do so would be in breach of s61N of the ITEPA.” He adds: “In which case, the contractor can rightfully claim that they suffered an unlawful deduction with reference to this.”

How much could I potentially claim?

How much you can claim will hinge on your personal circumstances, and factors such as the length of your engagement and the number of unfair deductions that you have suffered. Tax Reclaim will ensure that you recoup all the tax that you shouldn’t have paid in the first place.

The most significant of these is employer’s NI, which, at a rate of 13.8%, is a cost that many hirers are passing onto their contractors. To demonstrate the amount that could be owed, we will take the example of a contractor on a 12-month contract at a rate of £400 a day.

To keep things simple, we’ll say that our contractor was granted an IR35 assessment which found them to be within the Off-Payroll rules. From here, their £400 rate should only be subject to income tax and NI via Pay As You Earn (PAYE). However, the hirer has also deducted the following from the contractor’s pre-tax rate:

  • Employer’s NI (13.8%)
  • Apprenticeship Levy (0.5%)
  • Pension (1%).

These deductions, for which the hirer is liable to pay separately, reduce the contractor’s pre-tax income by more than £53 per day, effectively slashing their rate to less than £347, prior to PAYE being deducted. Over the course of the contract, during which the contractor works 220 days, the sum that they can claim for amounts to £11,677.

How to make a claim with Tax Reclaim

If you believe you have been the victim of misrepresentation, finding out whether you have a valid claim, and pursuing that claim, couldn’t be easier. Initially, you will need to fill in an online form detailing the contract in question.

Our specialist tax expert will then arrange a free telephone consultation with you, during which they will evaluate your claim, determine the exact sum that you may be owed, and explain your chances of success.

Should you wish to pursue your claim with Tax Reclaim, the fee is then £399. For this, our team works on your behalf, liaising with all relevant parties in the contractual chain, as well as HMRC, in order to reclaim the money that you are owed.

Published: 25 June 2018

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IR35 and Off-Payroll Explained