HMRC slammed for ‘needlessly’ pursuing CEST-assured outside-IR35 contractor

Ignoring the results of its own online IR35 status checker tool resulted in HM Revenue & Customs (HMRC) needlessly pursuing a £100,000 investigation for three years into the tax affairs of an engineering contractor, it is claimed.

The government tax collection agency opened an investigation into the unnamed contractor’s tax affairs in November 2019, with HMRC zeroing in on two private sector contracts spanning four tax years that had been previously deemed as being outside IR35.

According to contracting authority Qdos, which represented the contractor in question, HMRC was shown evidence in July 2021 that the department’s own Check Employment Status for Tax (CEST) tool had confirmed the contracts as being out of scope of IR35.

The CEST tool was introduced by HMRC ahead of the public sector roll-out of the IR35 reforms in April 2017, which saw responsibility shift for determining how contractors should be taxed onto the organisations that engage them.

Previously, it was up to contractors to self-declare whether the work they do and how it is conducted means they should be taxed in the same way as salaried employees (inside IR35) or as off-payroll employees (outside IR35).

The online tool was introduced to help cut down on the administrative burden this shift in responsibility conferred on public sector organisations, by providing them with a checklist of questions to answer about the contractor’s working arrangements.

Their responses would be inputted into CEST, which would then return a result stating the contractor is working inside IR35 or outside IR35, or – in some cases – an undecided result.

In this instance, CEST confirmed the contractor’s engagements were outside IR35. The tax liability for these contracts amounted to £100,000, and Qdos claims HMRC disregarded the results of CEST and continued to pursue the case for a further 18 months post-July 2021.

“It wasn’t until January 2023 that Qdos … successfully shut the investigation down, with HMRC satisfied the contractor had been correctly operating outside IR35,” said Qdos, in a statement.

Qdos said it raised two formal complaints with HMRC over how it handled the investigation, which it claims was overseen by six separate HMRC tax officers during the three years it ran.

“If you want evidence of everything wrong with HMRC’s approach to IR35 and aggressive pursuit of innocent individuals, this is it,” said Qdos CEO Seb Maley. “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, the tax office ignored advice from its very own IR35 tool. How can anyone trust this tool if HMRC doesn’t?

“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,” he said.

Computer Weekly contacted HMRC for comment, and the department said it was unable to speak about the specifics of this case due to taxpayer confidentiality. It did, however, supply the following statement:

“It is right that we conduct enquiries when we have reason to believe tax may be owed,” it said. “We stand by CEST’s results, provided accurate and correct information is used, in accordance with our guidance. The tool is rigorously tested against case law and settled cases by officials and external experts. We keep all guidance products, including CEST, under review.”