A self-employed contractor has scooped thousands of pounds from HM Revenue and Customs after the tax body used its controversial CEST online tool to wrongly determine her tax status.
Susan Winchester, a marketing and business development consultant, dragged HMRC, Kinect Recruitment Ltd and three others to the Central London Employment Tribunal over £4,200 of unpaid holiday pay.
Her firm, SJW Marketing Solutions Ltd, had been contracted by HMRC. Officials ran the Check Employment Status for Tax (CEST) tool to determine Winchesters status and the tool decided that IR35 applied. Having done that, the taxman then forced her onto an agencys payroll, a decision that could not be challenged.
“I just couldnt understand why somebody could make some arbitrary decision about my tax and employment status on a brief, over-simplified questionnaire that I had no input in and seemingly no right to challenge,” said Winchester.
When she took her case to the legal system, Winchester said that because she had effectively become an agency worker thanks to HMRCs decision, she was therefore entitled to holiday pay and to the same holiday entitlement as actual employees of the tax collection agency.
Had HMRCs minions been reading The Register, they may have avoided this costly blunder. CEST is well known for delivering inaccurate results, with its multiple-choice question format assuming that mutuality of obligation – one of the core building blocks of a contract of employment – exists in every case. Critics said this means the tool is biased towards delivering results that wrongly tell people they should be paying more tax than is actually due.
CEST, as HMRC said earlier this year, is built on the assumption that “a contract exists or is being considered”, adding: “We do not anticipate the tool being used outside of these circumstances.”
The Association of Independent Professionals and the Self-Employed (IPSE), which funded Winchesters case, branded the settlement “a body blow to the governments chaotic and damaging IR35 policy”, with chief exec Chris Bryce adding:
“If HMRC dont understand their obligations under a system theyve created, how can they expect businesses to get it right? You cant just decide someone is inside IR35, shunt them onto an agency payroll and expect someone further down the line to pick up the tab for your obligations like holiday pay.”
Earlier this year an IT contractor won £26,000 in back taxes after a tribunal ruled that he was outside IR35, and not inside it, as HMRC insisted. ®
Contractors, stakeholders and MPs have access to a balanced analysis of sentiment towards HMRCs IR35 proposals, following the launch of ContractorCalculators summary of responses to HMRCs Off-Payroll working in the private sector consultation.
The summary encompasses analysis of more than 30 consultation responses and other relevant material from key stakeholders within the contracting sector, tax industry and legal sector and has uncovered numerous concerns shared by respondents:
Following HMRCs distorted representation of the impact of the public sector changes, specifically its cherry-picking of details from the IFF Research report within its consultation, there is a lot of mistrust between the contract sector and the taxman, comments ContractorCalculator CEO, Dave Chaplin.
He continues: Quite frankly, we dont trust HMRC to provide an accurate depiction of the feedback provided within its own summary, which is why we have decided to publish our own. It clearly shows that HMRCs claims are far from reflective of market sentiment, and that an inquiry is urgently needed to get to the truth.
ContractorCalculators summary gathers feedback from the likes of Ernst & Young (EY), the Institute of Chartered Accountants in England and Wales (ICAEW) and the Freelancer & Contractor Services Association (FCSA).
It relays the prevailing message that any further change needs to be considered and researched thoroughly, following the end of a full compliance cycle in the public sector, with many noting that the Off-Payroll tax yield will not be known until mid-2019. Others have pointed towards Off-Payrolls effect on the public sector as evidence of the negative impact of ill-thought-out legislation.
Multiple sources have called on HMRC to consider IR35 holistically alongside the Governments Good Work Plan, to help prevent the exploitation of contingent workers, which many argue Off-Payroll will accelerate further if extended into the private sector.
Off-Payroll delivered what many of us predicted, comments Chaplin. Those with low bargaining power have had employers taxes passed onto them via rate cuts, with no employment rights provided. Those who least could afford this change have been the ones most affected.
Many have warned Government of the disproportionate compliance burden that Off-Payroll would impose on small businesses, while questioning the timing of proposed change, as businesses brace themselves for Brexit and Making Tax Digital (MTD) for VAT in 2019. Others have criticised HMRC for using the public sector as a model for private sector change, despite their inherent differences.
HMRCs Check Employment Status for Tax (CEST) tool also comes under fire, with several stakeholders noting that recent tribunal cases have demonstrated that neither it nor HMRCs approach are fully aligned with IR35.
CEST has clearly failed, and with HMRC continuing to lose IR35 cases in court, it cannot seriously be tasked with educating 5.7m businesses on how to assess employment status, Chaplin adds.
The summary also highlights various alternative compliance solutions posed by respondents, but Chaplin emphasises that its primary purpose is to ensure that a fair representation of feedback to HMRCs proposals is conveyed.
Though HMRC puts forward two alternative compliance solutions itself, and invites suggestions from stakeholders, consensus within the sector is that the consultation is a mere formality and that a private sector expansion of the Off-Payroll tax is imminent.
We urge all of our readership not only to read this summary, but to share it with their MPs together with our 32 page Fact Pack. The Chancellor could make a decision on Off-Payroll within the November Statement, meaning we may have as little as two months to prevent Government from implementing legislation which would prove catastrophic for both the contract sector and the labour market.
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