Contractors suspected of being “false employees” win the vast majority of tax tribunal cases brought against them – raising further questions over the taxman’s ability to enforce the rules accurately.
The successful finding against BBC television presenter Christa Ackroyd, who was ordered to pay £419,000 by a tribunal, has been hailed as a huge win for the taxman.
But analysis of other cases relating to “off-payroll” working by advice service Contractor Calculator found that this was an exception. HMRC has won just one of the 10 cases it has brought to tribunal against the self-employed in the past decade. Another of the 10 was a split decision.
The self-employed are in the Government’s firing line. It emerged last week that a planned tax cut had been scrapped. The news came weeks after further analysis suggested that HMRC’s tool for assessing contracts was wrong “in almost half of cases”.
Dave Chaplin of Contractor Calculator said HMRC’s staff needed more training in the complexities of tax law to ensure they did not pursue unwinnable cases. He criticised the taxman’s tendency to pursue highly paid contractors when, by definition, these people were most likely to be genuinely self-employed.
He said: “The idea that there are vast armies of overpaid ‘deemed employees’ who are avoiding tax is flawed and HMRC has never produced any evidence to back up its claims. If there are so many, winning cases should be like shooting fish in a barrel, but the court suggests the barrel is empty.”
HMRC said the vast majority of these cases ended in a settlement and only the most challenging went to tribunal. It pointed to the Ackroyd case as an example of a major success and said it expected to win a number of similar cases currently going through the system. It insisted it was adequately resourced and said its inquiries of this kind had increased tenfold.
What is IR35?
The rules governing off-payroll working, or the practice of hiring contractors who are not full employees, are known as IR35. They were introduced in 2000 to stop workers claiming they were contractors when they were, to all intents and purposes, an employee to pay less tax.
Contractors typically pay corporation tax, at a rate of 20pc, while employees can pay as much as 45pc depending on their earnings. The employer also avoids paying national insurance if hiring contractors.
The trade off for the self-employed is the unstable nature of their employment, and the lack of benefits such as holiday and sick pay.
Things came to a head last year when the Government moved the responsibility for determining IR35 status from the contractor to the hiring body. Many have complained that wrong decisions were made and they are being taxed as employees without receiving the benefits.
This law currently applies to the public sector only but plans, potentially to be announced in this year’s Budget, are afoot to extend them to private companies following a consultation earlier this year.
Contractors in this situation, many of whom use employment agencies or umbrella companies to manage their affairs, have also seen their rates slashed as these companies must make national insurance contributions for those who fall outside IR35.
Prominent bodies including the Institute of Chartered Accountants in England and Wales (ICAEW) have urged the Treasury to push back any changes to 2020 at the earliest in order to assess the impact on the public sector.
Seb Maley, of Qdos Contractor, said: “It would be foolish for the Government to announce further reform in the Budget, with a view to enforcing the rules in April 2019. The public sector still hasn’t entirely got to grips with changes, and with 5.7 million companies, the private sector would be a bigger and more complex challenge altogether.”
Can I challenge a decision?
Chief among complaints of those hit by the changes introduced last year is that many public sector organisations acted overly-cautiously and made “blanket decisions” as to the status of contractors.
This leaves many disagreeing with the IR35 status handed to them. According to David Kirk, a member of the ICAEW with his own accountancy firm, these people have little option but to move employer.
There is a way, however, to claw back any national insurance (NI) contributions, although Mr Kirk said the amounts involved would be relatively small. A contractor can request HMRC returns NI contributions in the year they are made on the grounds they are not an “employed earner”.
The only way the taxman can decline is if a separate investigation has been carried out and comes to the same conclusion as the original IR35 decision. HMRC is allowed to return the payments and subsequently investigate.
However, Mr Kirk said the amounts involved would be small, with the bulk of national insurance being paid by the employer.
The proliferation of “middle men” in the form of agencies and umbrella companies means it is these bodies who would profit, while the contractor has been receiving a lower rate to compensate.