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Off-Payroll Tax proposals deny taxpayers access to justice, experts warn

HMRC’s plans to introduce a ‘client-led status disagreement process’ to the Off-Payroll rules when rolled out to the private sector impede access to justice, experts have warned.

The proposals, described in the taxman’s ‘Off-Payroll working rules from April 2020’ consultation, suggest that contractor clients design their own mechanism for resolving disputes over IR35 status assessments.

However, as various employment status experts have acknowledged, there are fundamental issues with plans which would effectively render the client judge, jury and executioner.

“Procedural fairness can only be guaranteed where the circumstances and evidence of the engagement are impartially assessed by an independent and competent decision-maker,” explains Martyn Valentine, director of The Law Place. “HMRC’s proposal of a client-led process falls way short of meeting this requirement.”

What is HMRC’s ‘client-led disagreement process’?

Recognising criticisms of its failure to implement an appeals process for contractors in the public sector, HMRC has set out vague plans for a client-led process, which it claims should:

  • Include the consideration of evidence put forward by either party
  • Advise the parties of the outcome of that consideration
  • Advise on the reasons for said outcome.

According to HMRC, the proposal would ‘allow organisations to tailor the process to fit in with their wider business processes, while maintaining a level of consistency across all organisations’.

Client-led process: the risk for contractors

The more pressing matter is how this new process will affect contractors. Following reports of widespread non-compliance by public sector hirers, there are major concerns that practices whereby contractors are blanket assessed as ‘inside IR35’ will become commonplace in the private sector.

David Kirk, of David Kirk & Co, notes that any process implemented will not have the confidence of contractors unless underpinned by expert guidance. Unfortunately, he anticipates this will rarely be the case, due to heavy reliance on HMRC’s Check Employment Status for Tax (CEST) tool, which has recently been shown to return contentious outcomes:

“Most clients will not have the expertise to make considered decisions, and so will hide behind CEST. This will be encouraged by HMRC, which is itself hiding behind CEST.”

As Valentine and Alexander Wilson, IR35 barrister of Invicta Chambers, highlight, lack of expertise and reliance on CEST aren’t the only factors which could result in clients reaching contentious dispute resolution outcomes:

“Inevitably, the client will lack the expertise to properly consider the evidence put forward by the contractor and is therefore likely to take a risk-averse approach,” notes Valentine. “The likely outcome for any contractor challenging a status decision is an ill-considered and biased review of the evidence.”

“The client has a clear vested interest,” adds Wilson. “An ‘outside IR35’ assessment provides a tax advantage, whereas an ‘inside IR35’ removes any risk of tax liability. Where the interests of the client lie may depend on their attitude to risk and the quality of their advice.

“While I don’t necessarily believe that the reforms will inevitably lead to blanket ‘inside IR35’ determinations, this may well be the likely position of any risk-averse clients. We have already seen a major high street bank adopt such a stance.”

Ultimately, Wilson notes that such a process will only add protection if it is sincerely adopted by businesses. If not, he warns that the same pressures influencing decision making on the ground will continue to inform the result, leaving contractors with no hope of an impartial decision.

HMRC proposals prevent access to justice

At a recent House of Lords debate concerning HMRC powers, Lord Judge reminded those present: “We have the right to unimpeded access to a court. It is one of the essential principles on which the rule of law is founded. Note that I emphasise ‘unimpeded’.”

As Wilson observes, Lord Judge’s comments echo Article 6 of the European Convention on Human Rights, which states: ‘In the determination of his civil rights and obligations… everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.’

Wilson notes that HMRC’s proposals would present significant obstacles which would likely prevent affected contractors from accessing justice via the court in a reasonable time:

“There is no guaranteeing that a client-led process would resolve the difference of opinion, and these proposals remove the contractor’s ability to challenge the decision before a tribunal. Thus, the proposal appears to fail to fulfil the requirements of both common law and the European Convention of Human Rights.”

Valentine agrees: “A client-led process presents a significant obstacle to justice by way of the courts for a contractor. Such a process would also inevitably fall short of the requirements of Article 6 because the decision maker will be inherently biased. Where an interested party is making the decision, fairness goes out of the window.”

How might contractors gain access to the courts?

“The only available challenge I can see is that, at year end, the individual makes a claim for a rebate for overpaid tax on the basis of an incorrect assessment,” Wilson continues. “That will result in an investigation and - when most likely rejected by HMRC - an appeal to the tribunal. It would be a long time indeed before the contractor could obtain redress.”

Kirk agrees that there must be recourse to the courts if a client-led process is to ever be considered an impartial means of resolution. Yet he acknowledges that the only ways a contractor can ensure such are unconventional:

“Providing it isn’t written into their contract that the Off-Payroll rules apply, contractors could sue fee-payers for the recovery of debt. They could also reclaim National Insurance Contributions (NICs) paid in error directly back to HMRC, and take the view that they have received dividends instead of employment income on their self-assessment tax return. The trouble is that neither remedy is designed for this particular purpose.”

Should HMRC be involved in the dispute resolution process?

Experts are unanimous that the involvement of an impartial third party is the minimum requirement for any arbitration process to be considered fair. Following the consultation, HMRC was criticised for proposing rules exempting itself of any responsibility, a decision which Kirk suggests is likely down to the unwanted workload that would incur.

However, for Wilson, HMRC’s questionable IR35 tribunal record suggests that its lack of involvement may be beneficial: “HMRC’s recent success rate in IR35 tribunal cases is shockingly low, and one which speaks of endemic problems with application at a fundamental level.

“I would not be confident that HMRC being the arbiter would result in the correct decisions being made. This would produce high levels of uncertainty and a large number of legal challenges, at a significant cost to industry and the public purse.”

“The taxman is unlikely to be able to mediate either competently or impartially,” adds Valentine. “HMRC’s tribunal record demonstrates that it no longer has the expertise to accurately and promptly assess status on a case-by-case basis. HMRC’s involvement in such a process would inevitably invite the use of its discredited CEST tool.”

Valentine concludes: “Ominously, the consultation refers to the use of HR processes, rather than a legal assessment, which needn’t be overly complicated or expensive. The arbitration system as governed by the Arbitration Act 1996 offers a perfect means of providing certainty and reassurance to both parties while avoiding the perils of involving HR departments or HMRC.”

Published: 24 May 2019

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