HMRC’s shocking IR35 tribunal track record

HMRC’s shocking IR35 tribunal track record must be considered amid reform plans

Recently, it emerged that HMRC ‘gave up’ on a three year IR35 enquiry which, in the process, saw them drop the £59,000 tax payment they claimed contractor, Garry Philpot owed as a result of working outside IR35 in the 2013/14 and 2014/15 financial years.

HMRC’s ‘odd’ decision – as it has since been described by Andy Vessey, Qdos Contractor’s Head of Tax – to drop this long-running IR35 case shines a new and very unfavourable light on the taxman’s competence throughout an IR35 investigation, not to mention HMRC’s ability to recognise ‘reasonable prospects of success’.

Prior to this recent development, it was revealed that HMRC has won just one IR35 tribunal outright in the past nine. They have lost seven of the remaining eight cases, and received a split verdict in the other. To put that into perspective, HMRC has a tribunal win percentage of just 17% since 2011.

Statistics like these make you wonder why the Government seems determined to extend IR35 reform when instead, without question it should be reviewing its own internal issues. But then again, for all we know, this track record might be factored into the pending decision on private sector changes. Predictably, we haven’t been told much about the approach.

If the gatekeeper has trouble understanding the legislation it created, then what hope do inexperienced engagers have when setting IR35 status? More so, how many more contractors will be wrongly targeted by HMRC going forward?

Needless to say, if the taxman struggles to spot clear-cut cases this does not bode well for contractors and companies in the supply chain. With the Government currently consulting on the possibility of private sector reform, contractors – and engagers for that matter – are feeling the threat of IR35 more than ever.

As many contractors know – and thousands have experienced personally – public sector changes last year resulted in a rise in the number of incorrect IR35 assessments. The potential arrival of private sector reform could well trigger a repeat performance, that is, until CEST is dramatically improved and engagers stop making risk-averse IR35 decisions.

If public sector changes are anything to go by, we can’t be blamed for thinking that HMRC will pursue contractors simply to chalk up an early victory, should private sector reform materialise.

Currently, HMRC is unpredictable when targeting contractors and seems eager to go the distance with cases that to IR35 specialists have less than a 50% chance of success. And so, the number of tribunals could rise.

This prediction is without taking into account the fight that 46% of contractors are prepared to put up when subject to blanket IR35 decisions. With nearly half of contractors ready to challenge role-based assessments – which are still rife in the public sector – we could still yet see an increase in the number of IR35 court cases. Given many of these decisions have been made without ‘reasonable care’ or consideration of the unique aspects of the working arrangement, how many would HMRC win?

There are a number of very legitimate questions to ask; how much time and taxpayers’ money is spent chasing a lost cause? And what impact does IR35 have on the mental health of a contractor who finds themselves unnecessarily under investigation? A monumental one, that’s for sure. This is a sector the Government – for the nation’s whole economic benefit – should be encouraging people to join, not dissuading.

The Government has been far too hasty when attempting to tackle what it suspects to be tax avoidance from contractors. 95% of independent workers certainly agree, describing HMRC’s handling of IR35 as aggressive, as opposed to fair. And it is HMRC’s shoot first, ask questions later policy which has ultimately led to its woeful tribunal track record – that and the effective defence put up by companies like Qdos Contractor in court.

Amid a number of defeats and a strange decision to drop a case after pursuing it for three years, HMRC has claimed just one scalp (the Christa Ackroyd case), which wasn’t hard to spot, according to many IR35 experts.

As the IR35 consultation draws to a close, common sense must prevail. It is vital that HMRC focuses on the design and effective policing of the current rules before they roll out any further changes which – given the current state of play – could see them involved in many more tribunal defeats.

Qdos Contractor provide IR35 services to the UK contractor market, including enquiry defence, insurance policies, contract reviews, and advice, alongside competitive business insurance policies.

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