An investigation into HMRC’s Check Employment Status for Tax (CEST) tool has revealed that thousands of contractors have been wrongly taxed.
The CEST tool is a fundamental part of the process where HMRC determines whether IR35 applies to an employment arrangement.
IR35 confronts tax evasion through “disguised employment”. It outlines how freelancers and contractors are taxed when working for a public sector client.
Contracting authority, ContractorCalculator, found that the errors were due to unlawful blanket assessments made by public sector employers, who could now see expensive consequences for the illegal deductions from their wages.
Commenting on the findings, CEO of ContractorCalculator, Dave Chaplin said: “We know that blanket assessments were imposed within the NHS and ministry of defence as well as on other key projects and now those bodies face considerable litigation risk because many contractors have been wrongly classified.
“Despite CEST’s advice, many hirers have been taxing contractors as employees and they are well placed to start mounting legal challenges.”
The results showed that 54 per cent of assessments which have been handled by the HMRC’s digital tool acquired an “IR35 does not apply” outcome.
Whereas, around 31 per cent will have resulted in a fail and 15 per cent proving inconclusive.
The investigation results follow the Institute of Chartered Accountants in England and Wales (ICAEW) advising the financial secretary to the treasury that CEST is not appropriate for private sector use.
Online guidance accompanying CEST states if there is information they think are wrong or if arrangements are manufactured, then the taxman can challenge the results.
Chaplin added: “HMRC essentially granted itself the freedom to challenge any assessment that it sees fit. Though hirers and agencies are effectively coerced into using the tool by HMRC, they know that an outside IR35 evaluation from CEST still poses significant tax risk.
“The disparity between the number of contractors who are told IR35 does not apply by CEST and those who are taxed as being outside of IR35 is no coincidence.
“The irony now is that they are lining themselves up for legal challenges from contractors who have been wrongly assessed. This will cost the hirers more as they work to defend themselves and face repaying the taxes due.”
Sign up to our newsletter to get the latest from Business Advice.