Absurd tax rules must be scrapped before HMRC claims any more victims

This week I am returning to the seemingly relentless pursuit of contractors by HM Revenue & Customs under the so-called IR35 rules. You might not think this is relevant to you but I think the way the taxman has been operating is an increasing drag on British business.

My reason to return to the subject now is the recent case at the Court of Appeal in which HMRC took on Kaye Adams, the Loose Women presenter.

When Gordon Brown announced the legislation in 1999 it was intended to stop a practice developing in the IT industry whereby employee John Smith would leave work on Friday and come back to carry on the same role on Monday as John Smith Ltd.

Unfortunately, a combination of muddled legislation and the aggressive use of the courts by HMRC has generated a heavy burden on business thanks to confusion about the rules and contradictory decisions in the courts. HMRC recommends the use of its “Check Employment Status for Tax” (Cest) tool but, as I explained last yearthis is almost unworkable.

Major government departments got it wrong to the tune of an astonishing £ 130m. They included the Department of Justice, which employs the judges who enforce the rules. In many cases HMRC, with the advantage of its deep taxpayer-funded pockets, has used the courts to pressure its “customers” to settle because the tax at issue is less than the cost of fighting the case through the courts.

Apart from Loose Women, Kaye Adams has worked on many other programs as a freelance journalist contracted through her company, Atholl House Productions. This included presenting regular shows for BBC Radio Scotland in 2015-16 and 2016-17. HMRC challenged the arrangement under the IR35 rules.

It took the case to the First Tier Tribunal, where it lost. It then appealed to the Upper Tier Tribunal and lost again. Despite these rejections it then took the matter to the Court of Appeal. The legal procedure is that matters of fact are established by the First Tier Tribunal and appeals can be made only on matters of law.

Given that, how has the Court of Appeal now decided in favor of HMRC? The answer to my mind illustrates just how confusing and unfair to taxpayers the law has become. Even now the outcome is uncertain because, although it decided in favor of HMRC, the Court of Appeal has referred the matter back to the tribunal to rule on the numbers.

I have enormous sympathy for Kaye Adams, who following the ruling said: “Two tribunals have already found in my favor and yet I am being placed back on the punitively expensive legal merry-go-round. The costs of defending myself now far outweigh the amount of tax that HMRC claims is at stake.

“Unlike HMRC, the hundreds of other freelancers under HMRC’s spotlight do not have the bottomless pit of the public purse to dig into, and this inequality of arms is one reason many are choosing not to appeal.”

How have we arrived at such a mess? The answer goes back to the test in the original legislation: would the service supplied have been treated as an employment if it had been provided directly by the individual rather than through a company? Fair enough, but what the legislation does not define is what is meant by employment.

It has been left for judges to decide, often in confusing and contradictory judgments. As one of the judges in the Adams case said: “It would certainly be desirable if there were one clear test or approach to determining whether a person was an employee. Important legal consequences flow from this determination. “

I contacted Keith Gordon, the lead barrister for Kaye Adams in this case. He said:

“In many ways IR35 typifies the problems that taxpayers face and why the whole system is overdue for fundamental reform. As the case law repeatedly makes clear, the difference between a self-employment and an employment can be extremely fine – indeed, there are some cases which can be legitimately classified either way. Yet the tax treatment of the two is usually vastly different. “

Although HMRC won the case it did not have it all its own way, as Mr Gordon observed:

“Five years ago HMRC persuaded Parliament to increase the burdens on the business community in this area because of what HMRC called widespread compliance failures. What is now beyond doubt is that it was not that taxpayers were failing to comply with the law as it was, but it was that taxpayers were failing to comply with the law as HMRC saw it, ”he said. “The recent decision in the Court of Appeal shows that the 2017 changes were predicated on a false basis.”

In short, the Government accepted the word of HMRC without sufficient scrutiny. Surely there can no longer be any doubt that the rules either need to be reformed wholesale or scrapped altogether.


Tax Hacks is written by Mike Warburton, previously a tax director with accountants Grant Thornton, and is published twice a month on Tuesdays. You can email Mike on [email protected]

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