A number of industry bodies are calling on HMRC to account for their recent actions towards contractors. Since reforms to the off-payroll rules were introduced last April, the contracting sector has come in for some heavy-handed treatment from HMRC in a so-called ‘compliancy’ campaign that many have likened to “witch-hunting.” Although the term may seem extreme, it draws attention to the fact that, once accused of wrongdoing, contractors have very little recourse. Even when contractors disagree with their IR35 status, many are being forced onto the payroll for fear of the financial repercussions.
In the latest IR35 developments, it appears that contractors are being targeted by “fishing” letters from HMRC. The letter states that according to HMRC’s records, the contractor has worked on public sector contracts within a specified time frame. Contractors are asked to verify their employment status using the ‘check employment status for tax’ (CEST) tool and to supply HMRC with the results. The letter also indicates that HMRC will follow up within a month to see what action has been taken, and threatens contractors with a penalty in the event that HMRC conducts a compliancy check and finds inconsistencies.
There are several issues with HMRC’s behaviour, which industry spokespeople are calling ‘deliberately misleading.’ Contrary to what the letter states, HMRC’s own legislation means that, from April 2018, public sector contractors are under no obligation to check their employment status, as this responsibility now lies with the organisation who is paying the contractor’s fees. In the event that a contractor does decided to check their employment status, the use of CEST is optional, rather than mandatory.
However, most worryingly, there’s evidence to indicate that many of the contractors who have been sent these letters didn’t actually work on public sector contracts during the specified time period. This discrepancy and others suggest that the correspondence is randomly sent in an attempt to trick contractors into HMRC’s system. This seems particularly unfair given the widespread view that CEST is notoriously biased, while the guidance around the new legislation is often confusing and contradictory.
Although HMRC has now acknowledged the need for improved guidance and support around off-payroll legislation before introducing the reforms to the private sector, their current actions indicate that rather than taking steps to help contractors ensure that they are operating compliantly, HMRC are taking advantage of the confusion and uncertainly that they themselves have created. Not only this, they are causing irreparable damage to the contracting sector by forcing contractors to continually jump through hoops that waste their valuable time and cause them unnecessary stress.
Industry spokespeople have urged contractors to ignore the letters, which they are calling a blatant abuse of power. Although the wording implies that contractors are under a legal obligation to respond, this is not the case. The letters only add credibility to the view that HMRC is cynically attempting to increase its tax yield at the contractor’s expense, and without proper regard for its own calls to act in a responsible and compliant manner.