HMRC refutes ‘blanket IR35 approach’ with Network Rail contractors

HM Revenue & Customs has said it has seen no evidence of blanket IR35 determinations in the public sector.

The claim is in response to an investigation by ContractorCalculator, which found 99% of contractors working for Network Rail were deemed by the public body to be caught by off-payroll rules in 2018.

Responding to a Freedom of Information (FOI) request by the contracting authority, Network Rail disclosed that only seven of the 817 contractors who were assessed over the course of the year were adjudged outside of IR35, while 810 were deemed caught.

ContractorCalculator claims this figure is a result of an “unlawful role-based blanket approach” agreed upon with HMRC, with assessments being conducted using their Check Employment Status for Tax (CEST) tool.

“Simply put, Network Rail has found this ludicrous proportion of contractors to be caught by IR35 due to unlawful compliance practices,” ContractorCalculator CEO Dave Chaplin said. “What’s most alarming is that its protocol was agreed following consultation with HMRC.”

For their part an HMRC spokesperson told Recruiter it has seen no evidence of blanket determinations in the public sector, adding: “HMRC does not comment on identifiable customers. Employment status for tax is determined by the contractual terms and conditions, and the actual working practices of an engagement. The off-payroll working rules do not affect the genuinely self-employed, nor do they focus on specific trades or professions.

“CEST was rigorously tested against known case law and settled cases. It is accurate and HMRC stands by the result if the tool is used correctly. CEST is not biased towards an employment outcome, giving a self-employed outcome the majority of the time.”

Responding to a separate FOI request, ContractorCalculator claims Network Rail disclosed its correspondence with HMRC after being asked by to provide an update on its compliance practices following the April 2017 IR35 changes.

In its correspondence, ContractorCalculator claims Network Rail details a ‘strawman process of determination of status’, which it acknowledges was agreed upon following discussions with HMRC.

“Within this area of contingent workforce, generic roles that would be covered were identified and categorised. The role itself was given a determination using the online tool and this determination was to be applied to whoever carried out such a role for the company.

“It’s unacceptable that HMRC has encouraged role-based assessments, which defy the legislation, let alone acknowledge that it’s a strawman process, which will have resulted in so many contractors being overtaxed,” Chaplin goes on.

“This approach will also be putting a strain on Network Rail, for whom the cost of hiring each ‘deemed employee’ who previously operated outside of IR35 will have increased significantly increased in order to retain them.”

Another key contributing factor to Network Rail’s low IR35 pass rate, Chaplin claims, is its reliance on CEST for assessing the status of each individual role. In its correspondence with HMRC, Network Rail acknowledges that it has decided to use HMRC’s tool ‘in all cases without exception’, and that ‘the result arising from this would be final with no appeal’, he added.

In response to ContractorCalculator’s claims, a Network Rail spokesperson told Recruiter: “Network Rail complies fully with the tax law. The arrangements we have in place for contractors have been developed using the HMRC online CEST tool and are entirely compliant with the requirements of the Intermediaries legislation.”

The off-payroll rules make end clients responsible for determining whether a worker who operates through a personal service company (PSC) or other intermediary is caught by IR35 or is genuinely self-employed. Where the worker is caught by IR35, the rules also make the fee-payer, which will often be a recruitment agency, responsible for deducting and then paying the worker’s tax, National Insurance and employer’s NI. The rules, which have already been implanted in the public sector, are being extended into the private sector from April of next year.

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