Challenging IR35 status via your tax return is not appropriate, Treasury minister wrongly claims

Lucy Frazer believes it is inappropriate for contractors to defy a client’s inside IR35 decision via their tax return, despite one PSC legitimately netting a tax rebate of £20,000 by doing so.

The Treasury minister gave the thumbs-down on Monday to using a self-assessment form to go against a past engager’s decision to tax the PSC at source, as an employee ‘inside IR35.’

Facing the Lords’ Finance Bill Sub-Committee, Ms Frazer was asked if she had ‘given any thought’ to the SA “challenge” route, as it could represent “a spanner in the works”.

'Doesn't sound very appropriate to me'

Baroness Noakes, who posed the query, even helped the minister by explaining that PSCs who feel “there is no point” arguing against an engager would likely just later employ their ‘right to fill in their tax return in the way they judge appropriate.’

“Well, that doesn’t sound very appropriate to me,” said the minister, rubbishing what is a lawful process that has now legitimately netted one PSC a £20,000 IR35 tax rebate from HMRC.  

The contractor, who got his engager-deducted PAYE and employee NI payments reimbursed, is a member of the Association of Independent Professionals and the Self-Employed (IPSE).

'A way to retain my hard-earned income'

And in line with the scenario put to the minister (that a PSC might say “fine” to an inside IR35 determination, only to later file their SA return on an outside IR35 basis), the IPSE member says he was “determined to find some way to reclaim my hard-earned income.”

Because, the contractor wrote, he wasn’t going to ‘take his client’s [unfair inside] IR35 ruling lightly.’ The contractor's full account can be viewed here.

Andy Chamberlain, the association’s director of policy told ContractorUK: “If a contractor disagrees with a client’s status decision, they might indeed be able to reclaim tax via their tax return. That’s what our member did.”

'Could apply to private sector engagements too'

Mr Chamberlain cautioned that there are risks, however.

“HMRC might say ‘no’ and then launch an investigation into other aspects of the contractor’s business,” for example, and such claims won’t be automatically paid out.

However, “this approach could apply to the private sector too,” he said, alluding to the IPSE member being assessed under the public sector IR35 rules of April 2017 (which are the basis of the 2021 rules).

Undisclosed is what it was (precisely) about the contractor’s claim or engagement that HMRC backed when he used his tax return to go against his engager’s decision to tax him at source -- what the new Treasury minister Ms Frazer told the House of Lords inquiry to be ‘inappropriate.’

'Forced to wait 18 months'

Yesterday, IPSE further cautioned that every taxpayer’s case is different and according to their member’s written account of receiving the hefty IR35 rebate, it was a lengthy ordeal.

Seb Maley, CEO of Qdos reflected: “This contractor -- after having been wrongly placed inside IR35 by their client -- was forced to wait 18 months to retrieve…[the] tax rebate from HMRC.”

On top of it proving that what’s ‘inappropriate’ according to the new financial secretary to the Treasury is actually an appropriate, HMRC process, Mr Maley says the £20k case of the IPSE contractor highlights the need to improve the Status Disagreement Process.

'Independent process for contractors to overturn incorrect IR35 decisions'

And improving the SDP is a prospect that the committee, notably Tory peer Lord Butler sounds keen on.

“To me, this [IPSE contractor’s] situation highlights the need for a fair IR35 status resolution process within all businesses,” says Mr Maley, from Qdos, which provides IR35 contract reviews.

“With a transparent and perhaps even independent process for contractors to overturn incorrect IR35 status decisions, those who have been wrongly classed as inside IR35 - sometimes without any hesitation - do not have to go through a similar [18-month] ordeal.”

'Anybody could have provided the officials' answers'

Meanwhile, another off-payroll expert is still trying to get over the other parts of Tuesday’s evidence to the committee, submitted by Ms Frazer, HM Treasury’s Suzy Kantour, HMRC’s Carol Bristow and HMRC’s Pete Downing.

“Almost anybody involved in the IR35/off-payroll space could have provided the answers for the [four] witnesses. The narrative of HMT and HMRC has not changed -- it is extremely frustrating and painful to watch,” says status expert Kate Cottrell.

A former tax inspector, she also said: “Once again the Lords demonstrated their firm grasp of all the off-payroll regime’s problems…[but the] witnesses’ commentary on CEST and HMRC’s continued reliance on the public sector ‘research’ will make most viewers [of the session] want to scream!”

'Contractors can disagree in the final analysis'

In the session and serving to correct the minister, HMRC’s Mr Downing clarified that PSCs do still retain the right to amend their tax return as they see fit, thereby potentially giving them an opportunity to oppose inside IR35 determinations.

So at odds with the minister’s characterisation of such an IR35-challenge-route being ‘inappropriate,’ Mr Downing said: “In the final analysis, if a contractor makes a self-assessment return, then they can disagree with that [inside IR35] status assessment in that return.” 

HMRC’s deputy director of employment status and intermediaries continued: “Although that is obviously subject to them making sure that they are taking reasonable care in order to do so, because there is potential liability to penalties if they’ve got that wrong.

“And they’d also have to make similar amendments to, for example, their company tax return, to make sure they were reflecting the correct position as they saw it for all the entities that might be impacted.”

'Getting it wrong'

At status advisory Bauer & Cottrell, there was a reminder last night that it’s not contractors who have so far got things spectacularly wrong, and it isn’t just Ms Frazer either.

“It’s a pity that the Lords did not press the witnesses further on the huge IR35 bills faced by the public sector for ‘getting it wrong,’” said the advisory’s co-founder Ms Cottrell, referring to the DoH, DWP, MoJ and Home Office. 

She added: “The four witnesses put the emphasis on ‘fairness’ but their answers were based on fantasy, and the continued refusal to admit the reality of the impact of the April 2021 off-payroll rules. So I'm looking forward to reading the Lords report because it will tell it all as it is, yet sadly, it is quite clear from this session that it will all fall on deaf ears once again.”