HMRC has been criticised for not understanding its own tax rules, along with its aggressive approach to policing IR35 compliance after a contractor was made to endure a three-year-long investigation carrying £100,000 in tax liability – despite HMRC’s own tool determining the worker as outside IR35.
The IR35 enquiry was opened in November 2019, with HMRC scrutinising the IR35 compliance of two contracts spanning four tax years held by an engineering contractor working in the private sector.
However, despite HMRC being shown, in July 2021, that the tax office’s own Check Employment Status for Tax (CEST) tool deemed these contracts outside IR35, HMRC disregarded this information and pursued the case for another 18 months.
It wasn’t until January 2023 that Qdos, which represented the contractor, successfully shut the investigation down, with HMRC satisfied that the contractor had been correctly operating outside IR35.
Throughout this IR35 investigation, the case was dealt with by six different HMRC tax officers. The point was also made to HMRC that the contractor had exercised their right of substitution (a key indicator of outside IR35 status).
Qdos made two formal complaints to HMRC over how the case was being handled.
Qdos CEO, Seb Maley said, “If you want evidence of everything wrong with HMRC’s approach to IR35 and aggressive pursuit of innocent individuals, this is it.
“Our client had a tax bill of £100,000 hanging over their head for well over three years. This was a needless, easily avoidable situation, which would have taken its toll on the contractor.
“This is despite us making it crystal clear to HMRC that the contractor was working compliantly.
Worse still, the tax office ignored advice from its very own IR35 tool. How can anyone trust this tool if HMRC doesn’t?
“This case is just one of many which reflect how chaotic and unorganised HMRC is, along with the tax office’s misinterpretation of the very rules it created.”