Empowering the Freelance Economy

IR35: can contractors claim back tax offsets?

"It is crucial that the employment and skills agenda is moved back up the list of priorities," says Tania Bowers of APSCo.
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HMRC estimates that the 2021 IR35 reforms to the private sector will or already have affected around 180,000 personal service contractors, compared to the estimated 50,000 contractors already affected by the 2017 public sector reforms. That said, HMRC has so far only found central government bodies to be non-compliant, none of which have challenged the millions of pounds in charges in court.

HMRC’s post-reform assessments and penalties are therefore not yet tested in the courts. A recent survey of contractors indicated that only a small proportion of respondents even trusted HMRC to stand by determinations made using its CEST tool. Therefore, if HMRC pursues private sector bodies, they may challenge its conclusions in court.

Such legal battles could lead to new case law with clarifications or binding judgments on how the rules should be applied, according to a report by National Audit Office which has investigated the implementation of the Off-Payroll legislation.

Commenting on the ONS report findings, Dave Chaplin, CEO of compliance firm IR35 Shield said: “This latest report by the National Audit Office serves to shine another bright spotlight on the flaws seeping through HMRC’s Check Employment Status Tool (CEST). 

“CEST has played a key role in the Off-payroll debacle that has unfolded and the lack of guidance by HMRC did not help the public sector, evidence by the number of Government departments that got Off-payroll wrong.”

Chaplin continued:

What’s more, the whole tax offsets issue that the NAO has flagged up is appalling and fails to align with the principles of equitability in the tax system. HMRC is taxing the same money twice.

In essence, £263m was paid by a Government body to another Government body, and now all those contractors can reclaim their tax back, and pay no tax on their earnings – that would result in a loss of revenue as a result of their investigations.

Dave Chaplin, CEO IR35 Shield

The IR compliance expert points out that since firms’ decisions on status are not binding in law, there is nothing to stop a “scurrilous contractor” claiming the tax back by saying they were really inside IR35.

He questioned what would HMRC do in such a circumstance: “Would they refund them and pursue the client? Or would they fight the contractor in court?  What a mess.”

He continued: “With the NAO stating that the private sector is four times bigger, does this mean there is a £1bn tax bomb ticking away that when detonated will send businesses to the wall, despite them all acting in good faith and trying to adhere to the new rules?”

A Figure that was published in the National Audit Office investigation into the implementation of the Off-Payroll legislation

Tania Bowers, Global Public Policy Director at APSCo, said she was disappointed to see the suggestion from HMRC’s own review into the long-term effects of Off-Payroll rules that the impact was ‘minimal’.

“This doesn’t correlate with what we’re seeing through our members and in our collaboration with the IR35 Forum,” said Bowers.

We agree with the sentiment from the NAO that the reforms had been rushed, which has led to a number of issues since its implementation. APSCo, along with a number of other stakeholders, has been vocal on the limitations in the reforms.

In particular, Off-Payroll is in breach of HMRC’s duty to tax fairly, which is particularly evidenced in the fact that NAO’s investigation suggests more tax is being collected than is due. While the contractor is being offered overpayment relief, no relief is available to the Deemed Employer.

Tania Bowers, Global Public Policy Director at APSCo

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