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Outside-IR35 contractor pursued by HMRC

HM Revenue and Customs (HMRC) opened a three-year investigation into a contractor’s employment status despite its own tool showing their status was outside IR35.

The investigation was opened in November 2019 and meant the contractor potentially faced £100,000 in tax liability.

The contractor was working on two private-sector engineering contracts and used HMRC’s Check Employment Status for Tax (CEST) tool to determine their status.

In July 2021 the CEST tool showed the contractor was operating outside IR35, meaning they were self-employed and providing a service to the business rather than working under the terms of an employee.

Despite this finding, HMRC continued to pursue the case until January this year.

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Tax consultancy Qdos represented the contractor and successfully closed the investigation.

CEO Seb Maley argued the case is an example of the failures of the government’s CEST tool.

Speaking to HR magazine, Maley said: “CEST isn’t fit for purpose, whichever way you look at it. That HMRC itself ignored an answer provided by its very own IR35 tool tells you everything you need to know. Businesses shouldn’t rely on CEST to determine the IR35 status of contractors. After all, HMRC won’t hesitate to disregard information put forward by the tool, which provides zero guarantees.”

IR35 reform in the private sector has been subject to scrutiny since it was introduced in 2021 as it placed the liability on employers to determine workers’ employment status and handle tax and national insurance contributions for employed contractors and agency workers.

The rules were initially tipped for reform when Kwasi Kwarteng became chancellor in September 2022, but the decision was reversed under Jeremy Hunt's chancellorship.

Though reports have shown organisations generally have found it easy to comply with IR35, grey areas in the legislation have meant many continue to call for reform.

Maley added: “While this investigation focused on a contractor, with the off-payroll working rules in play, businesses are now liable for IR35 and face significant bills in the event of non-compliance.”