HMRC ignored the results of its own IR35 tool confirming the contractor is operating outside IR35 and opened an investigation into a contractor’s tax affairs.

Qdos, an insurer that represents the self-employed has criticised HMRC for failing to understand its own rules. HMRC opened an investigation lasting three years into a contractor’s tax affairs in November 2019. The contractor was working on two private sector contracts spanning four tax years.  According to Qdos who represented the contractor in question, the HMRC was shown evidence in July 2021 that the contractor was operating outside IR35.  Operating out of the scope of IR35 was confirmed using HRMC’s own CEST Tool. Therefore, meaning they were self-employed and providing a service to the business rather than working under the terms of an employee.

IR35 – CEST Tool

HMRC introduced the CEST tool ahead of the public sector roll-out of the IR35 reforms in April 2017.  IR35 was introduced later to the private sector in April 2021. Previously, contractors were required to determine and self-declare if the work they do and how it is conducted means they should be taxed in the same manner as salaried employees (inside IR35) or as off-payroll employees (outside IR35).  But the roll-out of IR35 placed the responsibility onto the organisation that engages them.

The introduction of the online tool was to help cut down on the administrative burden it may have. The tool provides a checklist of questions to answer about the contractor’s working arrangements.  Answers will be input into CEST which returns a result stating the contractor is working inside IR35 or outside IR35.

In this case, CEST confirmed the contractor’s engagements were deemed outside of IR35. The tax liability for these contracts amounted to £100,000. And despite evidence shown, HMRC continued to pursue the investigation until January this year.

IR35 Reforms

IR35 reform in the private sector has been subject to scrutiny since its introduction.  Initially, the repeal would come into force this April when Kwasi Kwarteng became chancellor in September 2022 but the decision was reversed by the current chancellor Jeremy Hunt.