When will HMRC admit it has got this one wrong?
The world cup might only be a matter of weeks away and teams have been preparing for kick-off for months in a bid to lift the trophy on the other side of the world. But there will be no such accolades being handed out to HMRC, which is set to score a spectacular own goal despite the yellow cards flagged up since the IR35 reforms came into effect last year.
HMRC’s Check Employment Status for Tax (CEST) tool is flawed, its shortcomings are now public knowledge and we have evidence to show that the tool has not been tested properly, omits fundamental areas of employment case law and does not align with IR35 law. HMRC also admits that it omits mutuality of obligation (MOO) a key IR35 factor because it assumes MOO to be present in all contractor engagements.
Despite exhaustive requests, HMRC has still not given us any reason behind such a flawed assumption and HMRC’s stance is simply untenable. So, when will HMRC admit it has got this one wrong?
Writing for Business Advice, Dave Chaplin, CEO and founder of ContractorCalculator, an online contracting authority that has been campaigning on behalf of contractors and freelancers to challenge the tax office on IR35 and its reforms, spells out HMRC’s options as he sees them.
Admit CEST is flawed
If HMRC wants to maintain any dignity and integrity it needs to hold up its hands and admit it is wrong. The backlash will be fierce. Admitting HMRC has got it wrong and that CEST is flawed essentially means admitting that any assessments are void.
It means they have spent enormous sums of money developing something that is a white elephant thousands of contractors will need to be reassessed which will undoubtedly give rise to costly appeals and tribunals for many who have been wrongly put on the payroll and paid too much tax.
The embarrassment and spiralling costs could see the public sector reforms being shown a red card given that CEST was the key player in the roll-out. It would put an end to HMRC’s hopes of extending the reforms into the private sector yet whilst it would be a huge, costly scandal, it is still the better option.
Tax experts have speculated that HMRC does not consider MOO to be a useful test in determining IR35 status, insisting that a simple engagement, where a worker carries out work offered to them, constitutes MOO. In tax law, this is true. However, IR35 depends on employment status indicators that fall within employment law, which considers MOO to be an ongoing obligation between worker and hirer which is a much harder criterion to satisfy.
The recent MDCM Ltd IR35 tribunal case demonstrated that there is still no absolute clarity on the interpretation as the judge referred to both forms of MOO during the ruling. So, it wouldnt be a surprise if HMRC simply emphasised the complexities around MOO and avoided tackling the issue head on, diverting attention away from the omission in its tax tool and we will hear the same old arguments and nothing definitive.
The same goes for the independent research that HMRC has commissioned on the impact of the reforms on the public sector and the upcoming consultation for a private sector roll out. HMRC is ploughing on, committing foul after foul and is simply not seeing what everyone else is seeing, hearing and experiencing.
Why is HMRC not playing ball?
Despite being told over and over again it seems that HMRC has made no effort to fix CEST’s faults and despite releasing a tool that it admitted itself wasnt ready for public use, has continued to pay heed to assessments wrongly diagnosed.
A quick examination of the code for CEST shows that no significant changes have been made to the code for almost a year. It seems that despite being used hundreds of thousands of times in the past year, development of CEST seems to have been largely abandoned and anyone working on it has been put on the subs bench.
Time is running out
HMRC could rights its wrongs but it could also continue to cover up its failings with misdirection and false claims. If it chooses the latter it will plunge itself deeper into even hotter water as contractors prepare to litigate against agencies and clients for unlawful deductions of employment taxes. We can expect to see thousands of appeals against CEST hitting tribunals in due course.
When the whistle blows HMRC can expect a lot of shouting from the stands and chanting that exposes CEST and HMRC for utter incompetence and a waste of taxpayers? money and resources. I would suggest that HMRC abandons the match before it all kicks-off.
Dave Chaplin is the founder and CEO of ContractorCalculator an online resource for contractors, freelancers and the self-employed that has become the expert guide to contracting.