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Misleading letters from HMRC and the Treasury re-emphasise tin-eared approach to IR35

Misleading letters to ContractorCalculator from HMRC and the Treasury concerning the Off-Payroll Tax have once again highlighted Government’s ignorant and tin-eared approach to IR35.

In May, an open letter from ContractorCalculator laid bare many of the issues with the legislation and HMRC’s Check Employment Status for Tax (CEST) tool, while debunking several false claims which Government was challenged to answer for. Disappointingly, this has only yielded dismissive responses containing familiar stock answers from HMRC and the Treasury, reinforcing the need for intervention from an independent body.

“When we published our letter, HMRC promised us ‘a substantive response’,” notes ContractorCalculator CEO Dave Chaplin. “Instead, the taxman and the Treasury have cobbled together the same boilerplate statements that we have previously debunked, and which brazenly ignore the serious issues raised.

“How much longer can the taxman continue to brazenly dismiss the mounting evidence demonstrating the damage and non-compliance caused by the Off-Payroll rules and CEST? Surely it’s now time for an independent body to step in before a private sector extension of Off-Payroll and CEST cause untold damage to UK plc.”

HMRC and HMT glaze over CEST criticisms with tired assertions

Addressed directly to Chancellor of the Exchequer Philip Hammond and HMRC Chief Executive John Thompson, ContractorCalculator’s letter highlighted a number of evidence-based issues, including:

Responses failed to sufficiently address any of the challenges posed, with both HMRC and the Treasury relaying numerous half-baked claims that have featured prominently in recent Government discourse.

HMRC repeated its assertion that CEST had been ‘rigorously tested against known case law and settled cases’, despite the admission from HMRC’s second permanent secretary Jim Harra that no evidence of such testing exists. Meanwhile, the Treasury reiterated its confidence in the tool in stating: ‘CEST gives an answer in 85% of cases and HMRC stands by those results.’

“As we have highlighted many times before, it’s not about returning an answer – it’s about returning the correct answer, which CEST continuously fails to do,” comments Chaplin. "A coin toss returns an answer 100% of the time. Does the Treasury believe that would be a suitable mechanism for determining employment status?”

Taxman and evidence-backed CEST figures poles apart

Both Government bodies remain adamant that CEST isn’t skewed towards returning an ‘inside IR35’ outcome, with HMRC claiming: ‘Over the last 12 months, over 50% of its determinations have been for self-employment or outside the off-payroll rules.’ As Chaplin highlights, the figure provided by HMRC is wildly inconsistent with the evidence:

“Our Freedom of Information (FOI) requests uncovered the results of 3,909 assessments carried out across five major public sector organisations, of which 94% were deemed within scope of IR35. In addition to this, recent analysis by Deloitte examined almost 850,000 permutations of possible results using CEST and it gave an ‘outside IR35’ determination in just 6% of cases. That’s a long way off the 50-plus-percent that HMRC maintains.”

If HMRC’s claim is to be believed, the only realistic explanation for the discrepancy between the supposed proportion of ‘outside IR35’ assessments and the actual number of contractors granted said status is unlawful blanket assessments. However, the Treasury argues: ‘Independent research suggests that this has not generally been the case in the public sector.’

“The ‘independent research’ that the Treasury refers to is the HMRC-commissioned IFF Research report. The process of data gathering for this report was concluded in September 2017, according to the invitation to tender,” notes Chaplin. “This is besides the fact that there are widespread reports of unlawful blanket assessments, and in several cases substantial evidence of such conduct, which the Treasury has simply refused to acknowledge.”

In addition to being dated, there are also questions about the validity of the findings of and conclusions drawn from the IFF Research report. This is after FOI requests from ContractorCalculator revealed that significant information had been omitted from the study, and that it had failed to meet tender requirements.

“Any statistician will tell you: ‘absence of evidence is not evidence of absence’,” Chaplin continues. “If Government isn’t going to conduct any further research of its own – as HMRC has stated it has no intention to - of course it isn’t going to uncover any evidence of non-compliance. Of even greater concern is the fact that it continues to dismiss the widespread evidence presented to it.”

How much are HMRC and HMT to blame for blanket assessments?

A substantial amount of blame for blanket assessments should be attributed to Government. A common and misleading remark which has been made in Off-Payroll compliance seminars and was repeated in response to ContractorCalculator was: ‘Where individuals are working under similar terms and working practices it is likely that they will have the same employment status.’

“This is not only hugely misleading and clearly likely to incite blanket assessments, this statement is factually incorrect,” highlights Chaplin. “Two individuals could have similar working conditions, yet one could be outside of IR35 on the basis that they are in business on their own account (IBOYOA).

“Without properly assessing the individual, you will never know their correct status, so HMRC and the Treasury are encouraging non-compliance by encouraging that assumptions be made based on working practices.”

Indeed, IBOYOA was one of the crucial employment status factors in determining the recent Kaye Adams IR35 tribunal case, and one of many factors which isn’t considered by CEST. In addition to the tool’s shortcomings, it appears that its use won’t help firms to avoid the taxman’s scrutiny, despite HMRC’s assertions.

In writing to ContractorCalculator, HMRC reiterated: ‘we will stand by the [CEST] result if it is completed correctly and in line with the guidance’. This is a claim that was disproven mere weeks ago when HMRC attempted to have evidence derived from CEST struck out of an IR35 tribunal case.

During a preliminary hearing in the case of RALC Consulting Ltd v HMRC, the taxman’s legal counsel argued: “The application of CEST to the appellant’s arrangements is irrelevant to the issues to be determined by the tribunal.”

Chaplin concludes: “It seems that HMRC is only prepared to stand by CEST when the result favours the taxman. It has reached the point where you have to question whether anything emanating from Government concerning Off-Payroll is true. Both HMRC and the Treasury need to be officially held to account for their duplicitousness.”

Published: 22 July 2019

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