HMRC ignored its own IR35 tool and pursued innocent contractor for over £100,000, said insurer
An insurer that represents the self-employed has criticised HMRC for not understanding its own tax rules.
Qdos said it witnessed HMRC’s “aggressive approach to policing IR35 compliance” after a contractor client of the insurer was made to endure a three-year-long investigation carrying £100,000 in tax liability – despite HMRC’s own tool determining the worker as outside IR35.
The IR35 enquiry was opened in November 2019, according to Qdos, with “HMRC scrutinising the IR35 compliance of two contracts spanning four tax years held by an engineering contractor working in the private sector.”
Qdos said in a statement that despite HMRC being shown, in July 2021, that the tax office’s own Check Employment Status for Tax (CEST) tool deemed these contracts outside IR35, however, “HMRC disregarded this information and pursued the case for another 18 months.”
It wasn’t until January 2023 that Qdos, which represented the contractor, managed to shut the investigation down, with HMRC reportedly satisfied that the contractor had been correctly operating outside IR35.
Throughout this IR35 investigation, the case was dealt with by six different HMRC tax officers, Qdos reported. The point was also made to HMRC that the contractor had exercised their right of substitution (a key indicator of outside IR35 status).
Qdos made two formal complaints to HMRC over how the case was being handled.
Qdos CEO, Seb Maley, provided his insights following this case:
If you want evidence of everything wrong with HMRC’s approach to IR35 and aggressive pursuit of innocent individuals, this is it.
Our client had a tax bill of £100,000 hanging over their head for well over three years. This was a needless, easily avoidable situation, which would have taken its toll on the contractor.
This is despite us making it crystal clear to HMRC that the contractor was working compliantly.
Worse still, said Maley, “the tax office ignored advice from its very own IR35 tool. How can anyone trust this tool if HMRC doesn’t?”
Maley said that this case is just one of many which reflect “how chaotic and unorganised HMRC is, along with the tax office’s misinterpretation of the very rules it created.”
They make the rules as they go along
HMRC’s CEST tool is neither legally binding, nor does its use constitute reasonable care so it’s factually incorrect to criticise HMRC. Did the taxpayer get legal advice regarding IR35 on the contractual terms and other circumstances? If the schedule defines the services as a role, then the contractor has problems.