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Thousands of Workers are Suffering Incorrect Tax Thanks to IR35

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Thousands of employees working within the public sector are potentially being taxed incorrectly in an ongoing fiasco surrounding their IR35.

IR35 has always been a tricky piece of regulation, and it seems like it’s not getting any easier to manage with time. Serious questions over the accuracy of the Check Employment Status for Tax (CEST) tool are only being underlined by courtroom defeats for HMRC over status challenges. Meanwhile, confusion over the rules has contributed to an 8% year-on-year drop in contracting vacancies.

What is IR35?

IR35 is a piece of HMRC legislation designed to crack down on tax avoidance though “disguised employment”, or “false self-employment”. IR35 applies a set of rules to determine whether or not you’re really self-employed.  

What problems employees in the public sector are facing?

Last year, the rules changed and public bodies (or the agencies they used) suddenly had to decide if contractors were “legitimately self-employed”, it was predicted that problems would arise. Public bodies were inevitably tempted to play it safe by assuming IR35 always applied, or simply to stop making off-payroll payments altogether. Meanwhile, with contractors looking seriously at abandoning public sector work, the threat of a skills shortage couldn’t be ignored. Many have since gone into full-time employment, further thinning out the workforce in an increasingly competitive marketplace.

A Freedom of Information request revealed that 54% of CEST results are coming out as “IR35 does not apply”. Blanket decisions being made by bodies like the MOD and NHS mean that thousands might currently be classed and taxed incorrectly. Damningly, even HMRC seems not to trust CEST, leaving itself enough wiggle room to challenge its decisions.

As RIFT tax refund MD Bradley Post points out, the damage may not even remain limited to the public sector:

“If HMRC stands by the new system, and it looks like they will, rolling it out to the private sector ensures a level playing field for all. (Albeit a rubbish playing field!). The only benefit of rolling it out to the private sector is to potentially stop the haemorrhaging of contractors leaving the public sector.’’