Not long ago discussion of IR35 seemed to be a one-way street. HMRC were talking up the “success” of public sector changes, paving the way for a rollout to the private sector. In February they were buoyed by victory in a case which saw BBC journalist Christa Ackroyd deemed inside IR35 and handed six figure tax bill. Online comment sections filled with words like “tax cheats” and HMRC trotted out their usual anti-contractor soundbites. More recently though things have not all gone the taxman’s way, leaving IR35 in a state of confusion.

The first cracks in HMRC’s position came at parliamentary hearings in the wake of the Ackroyd case. At first things went more or less the way the Revenue would have hoped. BBC presenters told the DCMS Select Committee of being pressured by the BBC into using a limited company. When top tax QC Jolyon Maugham gave evidence, the HMRC story began to fall apart. For a year now, ministers and HMRC officials have insisted that the huge numbers of contractors being added to public sector payrolls since April 2017 shows how widespread so-called false self-employment is.

Mr Maugham instead predicted that blanket inside IR35 decisions could be the next contractor tax scandal, warning that the committee could well be meeting again in two years’ time to examine situations where engagers are declaring all contractors as inside IR35 “in circumstances where the law does not support that conclusion.” The top tax expert also criticised HMRC’s reliance on CEST, their online IR35 testing tool. Pointing out the difficulty of telling genuine contractors from disguised employees within a single industry, he declared that HMRC’s aim of a single tool for all industries is “beyond current technology”.

As if to prove Mr Maugham right, within a week the Tax Tribunal ruled that HMRC was wrong to decide a contractor was inside IR35.  The Revenue had relied on some of the factors CEST relies on heavily, such as supervision, direction and control, to declare that the contractor was a disguised employee. The tribunal overruled them, saying that the whole circumstances of the contract had to be balanced to reach a decision, and that the contract in question was one of self-employment. The ruling raised questions about the practicality of IR35. “If HMRC, with all its expertise seemingly cannot make a correct determination, how are public authorities and individual businesses supposed to get it right?” asked Andrew Chamberlain, IPSE’s deputy director of policy and public affairs, warning of chaos and uncertainty if last year’s public sector changes are rolled out to the private sector.

Chaos certainly seemed to build as the minutes were published for the latest IR35 Forum. The meeting, which brings together industry representatives and members of HMRC’s IR35 team, was split on the subject of Mutuality of Obligation (MoO), which HMRC insists exists in any contract. Representatives of contractors and recruiters disagree, pointing out that many contractors are able to walk off a job without notice. Given that MoO is often interpreted as a key indicator of employment status, questions were asked about the fact that CEST does not ask about it. Forum participants were vocal in their disagreement, with Julia Kermode of FCSA, a group representing umbrella companies, calling it “a significant omission that ignores accepted case law.”

The value of CEST, which HMRC still relies upon as a key part of its IR35 approach, was thrown into further doubt this week by revelations published by IR35 experts ContractorCalculator. After months of diligent research and requests for information stonewalled by the Revenue on administrative technicalities, the site managed to force HMRC to reveal that it has no evidence to show CEST provides accurate results. Instead it seems that the Revenue relied on ad-hoc testing, with no records of outcomes, justifying this by saying that the tool was tested “in workshop”.

This claim astounds ContractorCalculator’s CEO, Dave Chaplin, himself an experienced software developer, who points out that any of his private sector clients would have fired him for taking that approach. “You have to ask yourself why HMRC has chosen not to be transparent with this crucial part of the testing of the tool,” he writes. “It’s absurd that there is supposedly no detailed documented evidence of formal testing of the tool. Has HMRC shredded any evidence to cover up CEST’s shortcomings?”

Criticised by a legal expert in parliament, ruled against in the tribunal, at odds with members of its IR35 Forum and unable to provide evidence that its CEST tool even works, HMRC’s approach to IR35 seems simply chaotic. Contractors and the organisations that hire them will be hoping they choose not to spread the chaos.

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