Why HMRC’s client-led status disagreement process creates more issues than it solves

It came as no real surprise that the draft legislation for IR35 reform in the private sector resembles the changes that were introduced in the public sector two years ago, writes Seb Maley, CEO of Qdos.

After all, HMRC remains under the illusion that public sector reform has been a roaring success. While we certainly disagree, in the eyes of the taxman, the legislation only needs a few tweaks here and there for it to be right for the private sector.

One area of the legislation which HMRC plans to adjust is the course of action that a contractor should take when disputing what they believe are inaccurate IR35 decisions made by end-clients.

A “Client-Led Status Disagreement Process” will be introduced which, in HMRC’s opinion, will give contractors the power to overturn determinations that they feel are unfair, risk-averse or simply incorrect.

While any initiative introduced to give contractors a better chance of having their tax status set correctly should be welcomed, the very fact that HMRC has handed the responsibility to the end-client to lead on this simply doesn’t stack up.

Under the proposed rules, if a contractor appeals a decision to their client, who disagrees with the contractor’s view, the end-client’s opinion is effectively final and will stand.

This is a major concern, given that effectively, upon the April 2020 arrival of IR35 changes in the private sector, HMRC looks like it will restrict a contractor’s freedom to appeal.

As you might already know, in the private sector currently, contractors have a number of avenues to explore when challenging HMRC regarding IR35 status.

For example, independent workers can contact the Alternative Dispute Resolution (ADR), where an impartial HMRC official with no involvement in the case will mediate between the two parties.

Granted, having your contract reviewed by another HMRC official perhaps isn’t the most attractive option, and the jury is out on whether an ADR is just a tick-box exercise for an HMRC paying lip service to the review process, with no intention of altering its position.

That said, we were involved in an IR35 case recently which rumbled on for more than two years. Then, immediately after an ADR meeting, HMRC accepted that IR35 did not apply to the engagement and subsequently closed the case, showing that a coordinated review of the facts – even when facilitated by an HMRC employee – can produce a favourable outcome.

Because contractors in the private sector currently set their own IR35 status, independent workers aren’t forced to contest decisions with their clients. It is HMRC they have to challenge if the taxman decides to investigate. Aside from an ADR, contractors can look to appeal at a tribunal -- and we have seen many instances of this happening recently.

In fairness, the draft legislation doesn’t disclose whether appeals through the existing routes will be completely abolished, but because the legal responsibility for setting IR35 status will be transferred to the end-client, avenues like ADR -- which are only available when there is a dispute with HMRC and not an end-client -- are unlikely to be available.

The chance of a contractor overturning an inaccurate determination could rest on the processes the end-client is using to make IR35 decisions -- this has certainly been our experience in the public sector anyway.

Should the end-client use an independent IR35 specialist to set status, evidence is collected from both the contractor and the end-client at the outset, so the initial determination can take all relevant factors into account.

Doing this reduces the risk of a contractor subsequently challenging a decision. By presenting the rationale for any decision to both the end-client and the contractor, both parties fully understand why a particular determination has been made. Ultimately, if there is a dispute, we will look to mediate between the parties to ensure we have a comprehensive view of the situation.

But for end-clients that rely on CEST, for example, which provides answers that are subjective and open to interpretation, there is no mediator. While CEST aims to give a black or white answer (85% of the time anyway), the process of challenging this information can be complicated without an independent party involved. Looking ahead to private sector changes, it could be a similar situation.

The draft legislation also states the need for end-clients to respond to disputes within 45 days, which is a particularly long time in the contracting world. It leaves contractors who have received an incorrect determination financially-disadvantaged for a prolonged period.

So, in apparently attempting to give contractors the right to overturn incorrect IR35 decisions made by an end-client, HMRC could make it more difficult than it currently is.

Ultimately, in leaving the dispute process in the hands of the end-client, HMRC has also shown that it has no intention of getting its hands dirty and will not be setting up an independent body to handle status disputes any time soon.

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Written by Seb Maley

Seb Maley is an IR35 expert, regularly commenting in national media on the topic. He is CEO of Qdos Contractor, a leading IR35 advisor and IR35 insurance company.
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