Challenging inside IR35 status as a contractor: a how-to

If a contractor disagrees with an IR35 determination that classifies them as "inside IR35," what do they do?  This happened recently to a contractor who was classified by the NHS as inside IR35 and has had PAYE deducted. 

Here, exclusively for ContractorUK, Rebecca Seeley Harris from Re Legal Consulting Ltd, discusses the various steps that need to be taken.

The Chapter 10 statutory, client-led disagreement process

The first port of call would be under Chapter 10 of ITEPA 2003 (the Off-payroll working rules). Under Chapter 10, there is a specific statutory process to challenge an "inside IR35" determination made by the end-client. This formal process is known as the Client-led Disagreement Process (CDP).

Under the CDP, the client is obliged by law to respond within 45 days, clearly stating if the original determination stands or if it has been revised, along with reasons for their decision. 

If the end client’s decision after reconsidering Chapter 10 ITEPA is final, that is the end of their statutory obligation.

The Jo Livingstone case

In the case of the contractor mentioned at the outset, Jo Livingstone, a physician with the NHS, she was a self-employed sole trader. 

But the NHS trust followed the same procedure as if she was a Personal Service Company (PSC). 

There are no statutory procedures to challenge the tax status if you are self-employed. So, if the end-client follows the CDP, then that is better for the contractor even if it is technically incorrect.

What happens if an inside IR35 contractor is dissatisfied with the client decision after 45 days?

If the contractor remains dissatisfied with the client's response, they can either accept the determination, negotiate contract terms to align more clearly with "outside IR35" criteria, or end the engagement and pursue opportunities elsewhere.

There is, however, an alternative avenue. If you are now receiving deemed employment income as inside IR35, you can appeal directly to HMRC.

A key shift, from administrative disagreement to HMRC dispute

Firstly, it's vital to understand that once the CDP is exhausted, the route to challenge your IR35 status shifts from an administrative disagreement with the client to a direct tax compliance dispute with HMRC. To approach HMRC effectively, your strongest argument will focus on presenting comprehensive evidence that your actual working practices align clearly with self-employment criteria.

To start this formal dispute, you typically use your annual self-assessment tax return as the initial point of contact with HMRC. 

This is your opportunity to explicitly declare the income taxed incorrectly and clearly explain that you dispute the IR35 status determination made by the client.

Make your outside IR35 argument to HMRC clear and concise

HMRC will want you to detail the reasons for your position. You should set out a clear and concise argument, emphasising key elements of employment status, the lack of control; your autonomy at work, your financial independence, absence of mutual obligation with your client, and ideally, any right of substitution you genuinely possess.

It is strongly advisable to provide HMRC with supporting documentation and evidence demonstrating your genuine independence. Contracts and written agreements with the client should highlight clearly defined working practices and explicitly indicate limited supervision, clear responsibility for rectifying defective work, and ideally, an explicit right of substitution.

Don’t forget in-business badges

Additionally, invoices you have raised, evidence of multiple clients, professional indemnity insurance you maintain personally, and records of business expenses you bear independently can substantially bolster your position.

Once your self-assessment is submitted, clearly stating your case and evidencing your status, HMRC may immediately accept your argument and issue a repayment of any overpaid tax. More commonly, however, they may initiate a compliance enquiry to investigate further. 

This compliance check is your next crucial stage, and you must approach it strategically, ensuring that you can robustly defend your position with clear evidence and confident arguments.

Now’s the time to consider enlisting a contractor specialist on IR35

At this compliance enquiry stage, engaging professional support from an employment status specialist can be invaluable. IR35 disputes often hinge on nuanced interpretations of working practices versus contract terms. 

Specialists understand precisely how HMRC operates, the arguments it accepts, and the key indicators it weighs most heavily. 

They are likely to look at a genuine control over your workload, the absence of mutual obligations between assignments, financial risk undertaken by you personally, and evidence of running a genuine business. Specialists who represent contractors include Bauer & Cottrell and Qdos.

Requesting an HMRC internal review

If HMRC’s enquiry concludes with a determination contrary to your position, you still have recourse.

Firstly, you may request an internal review by an independent officer within HMRC. This review, although still within HMRC, involves a fresh assessment of your evidence and arguments. 

At this point, you again have the chance to reinforce your evidence, potentially with additional supporting documentation or professional advice.

The ADR route -- your last stop before the FTT

You can also try Alternative Dispute Resolution (ADR). 

How successful this would be in the context of an IR35 dispute will depend on what arguments have been presented.  If you are at an impasse on case law, there is probably little point. 

Should the internal review or ADR still not result in a satisfactory resolution, your final option is to appeal your status to the First-tier Tax Tribunal. This independent tribunal provides an objective platform to hear your case comprehensively. It is a legal setting, but one specifically designed to allow taxpayers a fair hearing when disputing HMRC's decisions.

Again, strong evidence, clearly presented working practices, and professional representation significantly enhance your chances of success at tribunal.

Preparation, as well as (more) evidence

The importance of meticulous preparation and robust evidence cannot be overstated at each stage of this process. IR35 status is a matter of interpretation, and successfully reclaiming incorrectly deducted payroll taxes relies heavily on clear, convincing evidence. 

Document your working practices proactively, maintain records meticulously, and where possible, engage with professional advisers who specialise in IR35 disputes.

TL;DR: Client-led disagreement process, and appealing to HMRC, is worth a look -- if you’re not fainthearted

In summary, although the CDP process under Chapter 10 ITEPA has its limits, contractors still have a mechanism for reclaiming wrongly deducted payroll tax by formally disputing their employment status directly with HMRC. This route is not for the faint-hearted, and remaining persistent through HMRC enquiries and potential tribunal appeals is tough. So, be prepared.