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The Check Employment Status for Tax (CEST) tool has been heavily criticized for being inadequate to determine the IR35 status. The tool has been censured by tax accountants and parliamentarians alike for not being fit for purpose.
But how does the CEST actually assess the tax status of a contract. And why is it considered inadequate for the purpose. You will know the answer to these questions here in this article.
The CEST Tool: An Overview
The HM Revenue and Customs (HMRC) had introduced the CEST tool in March last year as the Employment Status Service (ESS). The tool allows public sector companies to know whether the IR35 status applies to a contract or engagement with an independent contractor. It evaluates different questions relating to the engagement such as:
- What is the scope of work?
- What are the responsibilities?
- How is the work done?
- Who decides when the work should be done?
- How is the worker paid?
- Whether the payments include reimbursement and benefits?
Public sector companies are required to determine the correct tax status as recommended by the CEST tool. However, instead of making the task simple, the CEST tool is actually creating increased complications.
Problems with the CEST Tool
After about a month of the launch of the CEST tool, the HMRC implemented the IR35 reforms. Companies and agencies faced a lot of problems in using the tool to assess the tax status.
The foremost problem with the tool was that companies had little time to assess the accuracy of the results. As a result, thousands of engagements were wrongly assessed. The HMRC had itself acknowledged that around 15 percent of cases can’t be determined by the tool. Increased feedback and longer testing time could have increased the reliability and accuracy of the results.
The fact is that IR35 is a complex tax-related regulation. It’s not possible for the CEST tool that consists of a short questionnaire to make correct tax assessments. There is a lack of depth and most importantly the Mutuality of Obligation (MOO) a central criterion of the IR35 is absent. This makes it an unreliable and flawed tool for assessing tax status of an engagement.
Blanket approaches and inaccurate determinations due to using the CEST tool means that many independent contractors have wrongly been considered as being employed for taxation purposes. The resulting chaos has the potential to cause a severe shortage of qualified staff that can have a negative effect on the UK’s economy.
A plumber has won a landmark legal case that is likely to have widespread implications for workers on self-employment contracts.
Gary Smith, who worked for London-based Pimlico Plumbers full-time for six years, took his case to the Supreme Court, over his entitlement to rights such as sick pay.
The five Supreme Court justices rejected an appeal by Pimlico Plumbers against a number of court rulings that determined he could claim “worker” status, even though he was described in his contract as a “self-employed operative”.
Announcing the decision in London, Lord Wilson said an employment tribunal was “entitled to conclude” the firm could not be viewed as Mr. Smith’s “client or customer”.
The judge said: “Although the contract did provide him with elements of operational and financial independence, Mr. Smith’s services to the company’s customers were marketed through the company.
“More importantly, its terms enabled the company to exercise tight administrative control over him during his periods of work; to impose fierce conditions on when and how much it paid to him, which were described at one point as his wages; and to restrict his ability to compete with it for plumbing work following any termination of their relationship.”
Some commentators have said the ruling is expected to have a major impact on what is often called the gig economy.
Flexible working arrangements, many of which involve firms recruiting people on a self-employed basis, have been on the rise in recent years.
It is thought the ruling could affect a number of other cases currently progressing through the courts but Pimlico Plumbers’ lawyer claimed its impact would be limited.
Susannah Kintish, of Mishcon de Reya, said: “This judgment does not lay down any new principles of law around worker status.
“Instead, all eyes will be on the government as businesses await legislation on how to categorise their workforce – something which could still be a matter of years away.
“In the meantime, the gig economy continues to evolve and existing employment law is rendered increasingly unfit for purpose.
“The Supreme Court Justices have made it clear that this judgment is very specific to the unique facts of the case.
“It will, therefore, do little to stem the flow of litigation around worker status which, in the absence of any overarching principles, will need to be determined on the specific circumstances of each case.”
Mr. Smith was on call by Pimlico Plumbers to carry out jobs for its customers and had a company uniform and van which he rented.
He claimed that, after suffering a heart attack in 2011, he was unfairly dismissed when he tried to reduce his hours.
A tribunal made a preliminary finding that he was a “worker” within the meaning of the 1996 Employment Rights Act – a decision that was upheld by the Employment Appeal Tribunal and again by the Court of Appeal in January last year.
The Court of Appeal found Mr. Smith was a worker because he was required to use the firm’s van for jobs and was contractually obligated to work a minimum number of hours a week.
As a “worker”, he was entitled to employment rights including holiday and sick pay, the court said.
HMRC lost IR35 cases against a Jensal Software Ltd and Armitage Technical Design Services Ltd (ATDSL) recently.
An independent research carried out by the Independent Health Professionals Association (IHPA) has revealed that the upper management of NHS trusts across the country has been involved in a multi-million-pound tax dodge.
After an in-depth analysis by legal experts at the IHPA, it was found that hundreds of NHS Trusts and accountants have been exploiting a loophole in the tax system that has resulted in umbrella companies pocketing up to 50 percent of the VAT. This has resulted in the financial ruin of a number of zero-hours NHS employees due to huge tax bills, and has led to significant losses to taxpayers.
The tax avoidance scheme involves accountants claiming to be offering healthcare services to Trusts in order to exploit a legal loophole. It resulted in tax avoidance of millions of pounds that should have gone to the Exchequer and then to the NHS that at present is facing financial difficulties. In addition, the affected workers will likely leave their roles at the agency due to facing financial breakdown, bankruptcy, and hardship.
According to the report from the IHPA, senior level employees at the NHS Trusts favoured blanket assessment of all independent contractors working at the public-sector company. The contractors were deemed to be self-employed regardless of the nature of their services, which unfairly stripped them of the benefits offered to regular workers. The scheme was considered illegal after the introduction of the IR35 tax reform in April 2017. Still, the practice has continued throughout the public-sector organizations including the NHS.
The scheme to avoid taxes was previously described by ex-chair of the Public Accounts Committee Dame Margaret Hodge as “Aggressive Tax Avoidance” and “Outrageous”.
While the private companies cash in from the scheme, workers face exploitation due to lack of benefits including sick pay, holiday pay, and pensions. The unfair tax treatment has actually resulted in these employees being taxed higher as compared to regular workers.
NHS Trusts are not only dodging tax bills, they are also flaunting the law by exploiting independent workers most of whom belong to minority population segment. This scandal could result in a court case against the NHS chiefs, accountants, agency staff, and emergency care providers according to the Criminal Finance Act 2017.
The scandal has emerged at a time when there is a growing criticism over the unfair prosecution of public and private sector workers by the HMRC. The poorly drafted resolutions regarding agency workers and contractors including the 2019 Loan Charge and IR35 (Off-payroll) legislation are expected to create a catastrophic effect in the UK economy.
Industry experts including head of legal department and Secretary General of the IHPA have fustigated the tax avoidance scheme by the NHS Trusts bosses and accountants and called for a stop to the current illegal practices.
Uber is to introduce numerous protections for its drivers through a new insurance scheme, including sick pay and maternity and paternity payments
The ride-hailing up, which has been involved in court cases over its use of gig-economy drivers, said it will provide insurance cover at no extra cost to its for 150,000 drivers across Europe.
Provided in partnership with AXA, Uber’s Partner Protection scheme will cover drivers against major cost or reductions in income resulting from accidents or injuries that occur when they have passengers in their vehicle.
The scheme, which begins on 1 June, will also provide income protection for events that happen when they are not working for Uber, such as sickness, having a baby, or jury duty.
However, drivers have to meet strict criteria to be eligible for the “off trip” insurance. Passenger drivers have completed 150 trips in the previous eight weeks before they can claim sickness, maternity, paternity or jury duty pay, while a delivery driver on its food delivery service Uber Eats must have completed at least 30 deliveries in the previous eight weeks to qualify.
For sickness or injury leading to more than seven consecutive days of inability to work, Uber’s passenger service drivers would receive £75 per day for up to 15 days. Uber Eats drivers would receive £30 per day.
All drivers would be paid a £1,000 lump sum while on maternity or paternity leave, and a £500 lump sum for jury service.
If they are injured while on a job for Uber, they would receive medical cover paying out up to £7,500.
Fellow gig-economy delivery firm Deliveroo has also announced that it will begin offering it’s 35,000 cycle couriers free insurance to protect them and their earnings if they are involved in an accident. It includes cover for up to £7,500 of medical expenses and up to 75% of average gross income.
In October 2016, the Central London Employment Tribunal ruled that Uber drivers could not be classified as self-employed and were entitled to rights including holiday pay, the national minimum wage, and breaks. The decision was upheld by the Employment Appeal Tribunal in December last year.
Uber admitted that in the past it had “focused too much on growth and not enough on the people who made that growth possible” and wanted to give its drivers more security.
Pierre-Dimitri Gore-Coty, vice-president and head of operations EMEA at Uber, said: “Partner Protection is an important step in addressing some of the biggest concerns raised by our independent partners who rely on Uber. But the listening doesn’t stop here. We’ll continue to ensure that the voices of the drivers and couriers are heard as we take Uber forward together.”
Mick Rix, national officer at the GMB union, which represents Uber drivers, said the decision was “a major step in the right direction”.
However, the scheme was likened to a publicity stunt by the Independent Workers Union of Great Britain. James Farrar, chair of the union’s United Private Hire Drivers branch, said: “Sadly, this is once again a case of tinkering around the edges for a quick PR win, rather than dealing with the issue at hand.”
Seven members of senior management at recruitment company Workchain have pleaded guilty to gaining unauthorised access to computer data in order to opt the agency’s temporary workers out of its pension scheme.
Appearing at Derby Magistrates’ Court on June 7, the defendants admitted devising a plan where five members of staff posed as the temporary employees, opting them out of Nest’s online system.
The master trust first reported its concerns over Workchain to the Pensions Regulator in May 2014.
A joint investigation between the regulator, the Employment Agency Standards Inspectorate, Derbyshire Constabulary and Nottinghamshire Constabulary was subsequently launched.
It was discovered that owners and directors Phil Tong and Adam Hinkley encouraged financial controller Hannah Armson, human resources and compliance officer Lisa Neal and branch managers Martin West, Robert Tomlinson and Andrew Thorpe to remove the company’s temporary staff from its scheme.
The defendants pleaded guilty to section 1(1) of the Computer Misuse Act 1990. The offence carries a maximum sentence of six months in prison and/or an unlimited fine in a magistrates’ court.
Should the case be handed to the Crown Court, offenders face two years’ imprisonment and/or an unlimited fine.
It is the first time that the regulator has prosecuted individuals for this offence. They will be sentenced at Derby Crown Court on June 28 2018.
Employers in the UK support the elimination of the National Insurance Contribution (NIC) exemptions in order to reduce insurance coverage costs. Due to the exemptions, employees earning £162 per week and less are considered below employer’s NIC threshold. This encourages employers to hire part-time staff as they get a tax benefit.
According to a research carried out by the Institute of Directors (IoD) around 26 percent of the member’s support and 14 percent strongly support getting rid of NIC exemptions to reduce insurance coverage costs from the current rate of 13.8 percent.
IoD’s head of taxation department, Stephen Herring, had stated that chancellor Philip Hammond should simplify the NIC system by introducing necessary reforms. He said that the chancellor should remove the exemption for part-time worker that is disliked by company directors.
Herring stated that although the exemption may make intuitive sense, in reality it encourages firms to hire part-time workers instead of full-time workers. Making changes in the NIC by eliminating exemptions will create a more level field as it would subject employers NICs at the same rate for both part-time and full-time workers.
IoD’s research had found that nearly 65 percent of respondents had hired part-time staff, while only 34 percent had hired full-time staff. While only 3 percent of respondents had acknowledged national insurance treatment to have a significant effect on the decision to hire part-time staff, Herring said that this is not surprising as most of the members are small companies who employ one to two people.
Most IoD members are probably not concerned about the effect on employers’ NIC costs by hiring full-time workers since it’s not a significant amount, according to Herring. He said that it is the large companies such as Sports Direct that make decisions based on the threshold to make savings. These members would certainly support eliminating the threshold.
Last year, the Taylor Review had recommended an increase in the NIC contributions by employers in order to create a balance between self-employed and full-time employees. In addition, this year HMRC had launched an investigation to verify claims by an anonymous whistleblower that the UK courier service Hermes trained staff into reporting as self-employedin a bid to reduce NIC payments on weekly wages above £162. This is a latest in the series of cases that show how the NIC threshold employers are encouraging employers to carry on misleading tax practices.
The GMB union announced on Monday that it is taking legal action on behalf of members working for three delivery firms used by Amazon, arguing that the companies wrongly classed them as self-employed.
The GMB union wants its drivers to be given guaranteed hours and the minimum wage as well as sick and holiday pay.
The union said drivers should be classed as full-time employees rather than self-employed workers.
Amazon said its delivery providers were “contractually obligated” to pay drivers minimum wage.
The union said that drivers for the three firms were paid per parcel delivered and faced issues that fully employed workers did not, despite performing very similar duties.
Those issues include lack of job security, responsibility for insurance and maintenance of their vehicles and no right to sick pay, holiday pay or overtime.
Steve Garelick, a regional organiser for the GMB, said: “They are expected to deliver regardless of what their run is. They’re not paid any more for going over what anyone would consider reasonable hours to deliver – and they get penalised if they don’t deliver.”
The union said it was only bringing cases against delivery firms where GMB members had asked it to do so.
GMB general secretary Tim Roache said many of the union’s members who deliver packages for Amazon faced unrealistic targets, pay deductions if those targets were not met and “being told they’re self-employed without the freedom that affords”.
“Companies like Amazon and their delivery companies can’t have it both ways – they can’t decide they want all of the benefits of having an employee, but refuse to give those employees the pay and rights they’re entitled to,” he said.
Amazon said its delivery firms were expected to pay drivers a minimum of £12 an hour, “follow all applicable laws and driving regulations and drive safely”.
“Allegations to the contrary do not represent the great work done by around 100 small businesses generating thousands of work opportunities for delivery drivers across the UK,” it added.
Drivers told that they were not paid on time and required to break the speed limit in order to stay on schedule, and that they were not even allowed the time for toilet breaks.
In April, the delivery company Hermes, which delivers packages for retailers such as Next, Asos, John Lewis, Topshop and River Island, began a legal battle with eight of its own drivers. It is under pressure to settle after rival delivery firm DPD offered all its drivers sick pay and holiday pay as part of wholesale reforms to its gig working model sparked by the death of a driver it charged for attending a medical appointment to treat his diabetes and who later collapsed and died.
In 2016 the ride-hailing firm Uber was told its drivers should be classed as workers with minimum-wage rights.
Uber, which says its drivers are self-employed, lost its appeal against the decision last year but said it would appeal again. The case could end up in the supreme court this year.
Yet another court victory of an independent contractor against HM Revenue & Customs (HMRC)’s IR35 has come to the limelight, although the case was heard about a year and a half ago at the First Tier Tribunal (FTT). The plaintiff in the case was Mr. Armitage’s personal service company — Armitage Technical Design Services Ltd (ATDSL).
To avoid lengthening the case, Armitage had offered to settle the tax amount due on the condition that no penalty was imposed. However, HMRC had refused and insisted that the penalty should be paid due to negligent action of the taxpayer for not having discussed the IR35 with the accountant before submitting the P35.
Background of the Case
Armitage has worked in the nuclear industry in the capacity of an electrical control and instrumentation designer for decades. He offered his services to Diamond Light Source Ltd. through ATDSL and two other employment agencies.
According to HMRC, the work performed by Armitage between the period 2009 and 2014 was taxable under IR35 (https://www.ssumbrella.co.uk/what-is-ir35/). Armitage worked on different projects for DLS and other customers.
The case was evaluated by the presiding judge based on various points regarding employment and self-employment including the following.
- Control over Work
- Personal Responsibility
- Independent Work
- An Employee of the Organization
- Mutuality of Obligation (MOO)
In addition, the judge had found that DLS could easily have employed another qualified individual in place of Armitage, although it did not practice this right in reality. This meant that Armitage was not personally responsible for completing tasks.
Another point in favour of Armitage was that he was not part of DLS’s employee time management system similar to regular employees. Armitage worked for multiple clients and used his own software for time and project management.
Moreover, it was found that Armitage had not received benefits similar to DLS employees. He was not offered holiday or sick pay, or a personal locker as given other employees. This was because he was not considered employee of an organization.
Lastly, the judge had stated that the just because Armitage had offered services to DLS does not mean that mutuality of obligation (MOO) was applicable.
Based on the above findings, the judge had decided that Armitage’s work does not fall under IR35. He ordered that all tax and penalties should be cancelled. This shows the weak argument of HMRC in blindly extending IR35 reform to all independent contractors.
HMRC already lost an IR35 case against a contractor (Jensal Software Ltd) recently.
BEIS and HMRC launch campaign urging underpaid workers to complain as figures show that the number of workers getting the money they’re owed has doubled.
HM Revenue and Customs (HMRC) has more than doubled the number of underpaid workers getting the money they’re owed under the National Minimum Wage, according to latest figures.
In 2017 to 2018, HMRC investigators identified £15.6 million in pay owed to more than a record 200,000 of the UK’s lowest paid workers, and up from £10.9 million for more than 98,000 workers last year.
HMRC launched its online complaints service in January 2017, and this has contributed to the 132% increase in the number of complaints received over the last year and the amount of money HMRC has been able to recoup for those unfairly underpaid.
The figures are published as the government launches its annual advertising campaign designed to encourage workers to take action if they are not receiving the National Living Wage or the National Minimum Wage. The online campaign, which runs over the summer, urges underpaid workers to proactively complain by completing an HMRC online form.
The online service is a quick and easy way for anyone with concerns about not being paid the National Minimum Wage to report an employer or former employer anonymously.
Industries most complained about to HMRC include restaurants, bars, hotels and hairdressing.
Business Minister Andrew Griffiths said:
Employers abusing the system and paying under the legal minimum are breaking the law. Shortchanging workers is a red line for this government and employers who cross the line will be identified by HMRC and forced to pay back every penny and could be hit with fines of up to 200% of wages owed.
I would urge all workers, if you think you might be being underpaid then you should check your pay and call Acas on 0300 123 1100 for free and confidential advice.
Penny Ciniewicz, Director General of Customer Compliance at HMRC, said:
HMRC is committed to getting money back into the pockets of underpaid workers, and these figures demonstrate that we will not hesitate to take action against employers who ignore the law.
We urge anyone who is concerned they are not being paid the correct rates to contact us in confidence through the Acas helpline or through our online complaints form.
The UK government announced plans for HM Revenue & Customs to have more time to investigate cases where individuals have potentially made mistakes relating to offshore tax matters. Current assessment time limits of four or six years have been deemed not long enough to establish the facts and determine the amount of tax due.
But according to The Low Incomes Tax Reform Group (LITRG), there are “serious concerns” as taxpayers who have made “innocent mistakes” will become caught up in unnecessary extended investigations.
Robin Williamson, technical director of LITRG, said: “If HMRC are struggling to deal with the number of cases that involve offshore tax, that should be treated as a resource matter rather than an excuse to reduce taxpayer protection.”
Currently, if a taxpayer has taken reasonable care then HMRC may raise an assessment up to four years after the end of the tax year. The time limit is extended to six years if the taxpayer has been deemed as careless.
Those who have evaded tax deliberately face an assessment window of 20 years in any case and are unaffected by the changes.
Therefore, the changes affect even those taxpayers who have conducted their financial affairs in good faith and are unaware they may have an undisclosed liability, according to LITRG, with the proposals adding a “further layer of complexity” to the rules on time limits
The Chartered Institute of Taxation also has condemned the proposal as “wrong in principle”
“There is no evidential explanation in the consultation document of the more detailed rationale behind the measure (that it takes longer to investigate, or that the extra time needed is six years for careless errors and eight years for innocent errors),” the Institute said.
“Threatening letters from HMRC cause a great deal of unnecessary distress to vulnerable taxpayers, even if the amounts involved are trivial,” LITRG’s Williamson added. “But these proposals will make such letters more commonplace. An unrepresented taxpayer will often struggle to defend themselves, faced with complex rules on the taxation on offshore investments and having to obtain information which is so old.
“This is an issue which affects pensioners and migrants in particular, who are each more likely than other low-income groups to have offshore investments.
HMRC defended its decision and, according to reports said that it had not made its decision just yet.
According to a report in the FT, a spokesperson for HMRC said that it was “considering the responses we have received and we will publish a consultation response document in due course”.
Draft legislation on the matter is expected to be rolled out by HMRC this summer.
The UK government had introduced the tax legislation IR35 back in 1999 to tackle tax avoidance problem. The tax bill was intended to recoup £200 million a year for the exchequer. However, the government was able to recoup only £1.5 million per year between 2002 and 2007, according to the Professional Contractors Group Freedom of Information report.
Last year in April, the current Chancellor of the Exchequer Phillip Hammond had stated that public bodies would be responsible for enforcement of IR35.
Now, the HM Revenue of Customs (HMRC) has introduced consultation on plans to extend the off-payroll working rules to the private sector. This could affect nearly 2 million contractors who are employed in the private sector.
Confusion and Uncertainty Regarding the IR35 Consultation
Over the past few years, HMRC approach to consultations has been to have the market spend a lot of time in submitting responses, and then outright reject them. As a result, industry experts are understandably less optimistic this time around, and instead of challenging the plan are focusing on when it will be implemented.
PRISM Association – a trade body representing professional payment intermediaries sector in the UK – has voiced criticism of HMRC’s current approach to new legislation. The organization has identified dozens of incidents in which the authority was found to have made faulty decisions due to the complexity of tax rules, which contributed to confusion and tension in the market.
At a recent roundtable conference organized by PRISM, most experts had agreed that the current approach to enforcing new legislation was not working and a different thinking was required. HMRC was accused of manipulating the facts to make a case for the IR35 reform.
In addition, experts have criticized the tax agency for not listening to the concerns of businesses and accountancy bodies and not delivering reasoned responses regarding the matter that impacts over 5 million livelihoods in the UK.
The silo approach of HMRC has been heavily censured since it is contributing to confusion and complexity in the market. PRISM has stated that the long-term solution to the problem is to introduce reforms that create certainty of outcomes. There needs to be a strategic review that allows structural reform to remove Employers National Insurance (NI) threshold and reduce the headline rate for the taxpayers. All this must be considered to ensure that the IR35 does not cause negative reverberations in the market.
The government published the long-awaited IR35 consultation on 18 May 2018 for improving compliance with off-payroll working rules. While the scope of the report is narrow focusing on just three public sector areas — healthcare, education, and defence – it has a far-reaching impact on the UK economy.
The consultation proposed extending the IR35 reform to the private sector. At present, IR35 off-payroll working rules are applicable to the public sector. The government had cited statistics compiled by the HM Revenue & Customs (HMRC) to support the case for extending the tax reform to the private sector.
The main message of the consultation is that while there were issues in implementing IR35 reform in the public sector, the problems have been ironed out. Though, industry experts believe that there are still a lot of issues such as the absence of Mutuality Of Obligation (MOO) in the Check Employment Status for Tax (CEST) tool used for determining the IR35 status.
Moreover, questions have been raised regarding the reliability of statistics mentioned in the report. Experts say that there is doubt over the estimates of HMRC that only 10 percent of personal service companies (PSC) apply the IR35 rules in the private sector. In addition, the statistics that the cost of non-compliance will increase to £1.2 billion by 2022/23 is doubtable.
The consultation also states that around 51 percent of the public-sector companies had found it difficult to comply with IR35 rules. This is despite the fact that HMRC has stated that it provides dedicated support for compliance with the rules.
Another questionable point in the report is that the public-sector employment has reduced since the IR35 reforms were introduced. However, the report failed to highlight the fact that the engagement of off-payroll contractors had decreased more quickly as compared to on-payroll employees as per the expectations of the government.
The Recruitment & Employment Confederation (REC) and The Association of Independent Professionals and the Self Employed (IPSE) both have stated that they have found a lot of discrepancies in the consultation. There have been serious oversights and lapses by HMRC in the report.
According to Chris Bryce, CEO of IPSE, the organization has decided to challenge the proposal. Furthermore, REC has carried out a survey regarding the topic and will gather further evidence this summer to highlight inconsistencies in the consultation.
The consultation has been released just days after HMRC was heavily defeated by a contractor on an IR35 court case.
Hargreaves Lansdown Investors Stand to Receive £15 million from HMRC
Hargreaves Lansdown investors are set to receive a slice of the £15 million tax rebate if the investment company wins the next stage of the case against HM Revenue and Customs (HMRC).
Hargreaves had launched a case against HMRC in 2013 after its loyalty bonuses were deemed to be taxable. The loyalty bonuses that were introduced about 15 years ago passed discounts from fund managers that the company negotiated for its customers.
Until 2013, Hargreaves had paid loyalty bonuses free of tax to investors. However, HMRC had changed the tax rules regarding fund discounts due to which investors had to declare bonuses on their tax returns. They had to pay taxes on all bonuses other than on accounts that fall within a tax rapper such as self-invested personal pension (SIPP) and individual savings account. This according to Hargreaves was an unwarranted attack on private investors.
After changes in the tax rules, Hargreaves withheld 20 percent of bonuses paid to investors. This was done to avoid the prospect of its customer having to pay unexpected tax bills in case it didn’t win the case.
Hargreaves Wins the Case; HMRC Makes an Appeal
The tax tribunal ruled in favour of the FTSE 100 broker in March this year stating that the loyalty bonuses should not be taxed. The bonuses are a way to reduce investors’ cost instead of a profit. Around 150,000 investors stand to benefit from the pay-out that amounts to around £100 per investor.
However, HMRC appealed against the ruling at a tax tribunal, which is expected to run until the first half of 2019. The outcome of the appeal is expected to impact investors who received loyalty bonuses from Hargreaves and other fund platforms.
According to a spokesperson of HMRC, the decision made by the first-tier tribunal was disappointing and therefore an appeal was lodged. The current tax rules will be applicable until the litigation is complete.
The HMRC’s appeal against the ruling means that the celebration will be put on hold until the final verdict is given next year. Until that time, any bonuses paid to investors will still be potentially taxed. As a result, investors will have to wait until the tribunal gives ruling in their favour to receive any payout.
In case the appeal is rejected, investors will receive £15 million in annual management charges. Those who have already completed the tax return will be able to seek repayment of higher tax rates paid to HMRC.
This could be a big blow for HMRC as they already lost an IR35 case against a contractor (Jensal Software Ltd) recently.
The decisive court victory of Jensal Software Ltd. against HMRC shows that the CEST tool cannot be used as a litmus test for IR35 tax status determination. The main factor that contributed to the decision going against the tax agency was the test of Mutuality of Obligation (MOO).
MOO is an important factor when deciding whether an independent contractor offers services similar to a regular employee. This is the main factor that determines off-payroll or IR35 status of a locum contractor. However, this same factor is omitted when determining tax status using the HMRC’s CEST tool.
A surprising revelation from a webinar in which representatives of NHSI, NHS Trusts, and HMRC were present was that the MOO test was omitted from the CEST tool. This was due to the erroneous assumption that MOO is present in all agreements with contractors.
The latest court case against HMRC highlights the faulty reasoning in using the CEST test. According to Jolyon Maugham, the Director of The Good Law Project, this will raise the question whether actions of the UK public companies such the NHS and BBC in categorizing independent contractors as regular employees were lawful.
Impact of the Court Decision on Locum Contractors
The recent court findings suggest that CEST tool is not suitable and cannot be used of determining IR35 tax status. Without taking consideration of MOO, a contractor cannot be classified as an employee.
MOO must be considered by public companies such as NGS Trusts when making a decision regarding the tax status of a locum. The ruling of the recent court case signifies that the HMRC cannot encourage the use of CEST tool for tax determination.
Whether an independent contractor offers services as an employee depends on the obligation of the worker to offer services to the company and the corresponding responsibility of the company to accept work.
However, only a few locum contracts have a significant degree of MOO and the omission of this in the CEST tool to determine IR35 status is a clear mistake by the HMRC. Without this critical factor, an independent contractor cannot be said to be a permanent employee and therefore should not be taxed.
The HMRC has deliberately omitted MOO in assessing IR35 tax status. And this fact has been highlighted in the recent court victory of the IT company. It has shown that HMRC’s CEST tool is not credible is assessing IR35 status. As a result, there is a high likelihood that it will change the tax status of many locum contractors thereby reducing the tax obligations.
HMRC has opened its long awaited private sector consultation to tackle non-compliance with the IR35 reform. Last year in the Autumn Budget 2017, the government had hinted that it would discuss the problem of non-compliance of the IR35 reform or off-payroll working rules in the private sector.
According to estimates by the HMRC, only 10 percent of personal service companies comply with the legislations. The cost to the government due to non-compliance of tax legislation is reckoned to be about £700 million in 2017/18. This amount is estimated to increase to £1.2 billion in the next five years if no action is taken in this regard.
The IR35 was introduced in the year 2000 to ensure that independent contractors who offer services through a third party or umbrella company but work like an employee pay taxes like regular employees.
Previously independent contractors were required to report whether their work come under IR35. But after introduction of the IR35 reform in April last year, the responsibility of ensuring compliance with tax rules had shifted from contractors to recruitment agencies or public bodies that hire services of the contractor. This was intended to increase the revenue by £185 million.
Due to financial difficulties faced by the introduction of IR35 reform, a lot of public sector independent contractors particularly those related to the IT sector had decided to move to the private sector. Some departments had to increase the day rates in order to retain skilled staff.
The HMRC is now keen to extend the IR35 reform that has attracted a lot of criticism to the private sector. Having said that, the department has stressed that no final decision has been taken in this regard.
According to a spokesperson of the HMRC, the government has not made any decision to extend tax reform. At the moment, the government is only considering how the IR35 reform has affected the public sector and how it will impact individuals and businesses in the UK.
But the spokesperson also added that evidence show that the reform has been highly effective in addressing the issue of non-compliance with IR35 reform or off-payroll working rules. This means that it's highly likely that the reform will be extended to the private sector. If the IR35 rule is extended to the private sector, nearly two million or one-third of private sector employees could be affected.
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