Evidence of blanket IR35 assessments ‘deeply concerning’, industry warns

Almost all Network Rail contractors classed as employees for tax purposes, and other businesses are following suit

Almost all contractors working for Network Rail have been classified as falling within IR35 rules, according to a Freedom of Information (FOI) request which some experts have said raises “serious questions” about how businesses are approaching the issue of off-payroll working.

The news could indicate a role-based “blanket” approach to paying contractors via payroll, according to ContractorCalculator, which submitted the FOI.

The firm said 99 per cent of contractors working for Network Rail in 2018 were caught by the controversial off-payroll rules, introduced to combat tax avoidance by contractors operating through an intermediary and ensure anyone effectively working as an employee is taxed as one. 

The news meant 810 of 817 contractors working for the rail infrastructure provider had to pay income tax and employee national insurance, though their categorisation would not necessarily have entitled them to benefits such as sick pay, holiday pay or pensions. Network Rail has said it is fully compliant with tax law.

Dave Chaplin, CEO of ContractorCalculator, alleged the 99 per cent figure – which far exceeds the government’s estimate that only a third of contractors fall within the scope of the legislation – could indicate some firms are automatically classifying contractors as employees as part of a “blanket” approach.

He added that a separate FOI suggested Network Rail agreed with HMRC to use its Check Employment Status for Tax (CEST) tool to categorised contractors.

“Simply put, Network Rail has found this ludicrous proportion of contractors to be caught by IR35 due to unlawful compliance practices,” said Chaplin.

“What’s most alarming is that its protocol was agreed following consultation with HMRC.”

A Network Rail spokesperson said: “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 rules, which currently only apply to public sector employers, will be rolled out to the private sector in 2020.

According to Ornella Nsio, stakeholder engagement manager at the Recruitment and Employment Confederation (REC), the practice of blanket categorising contractors as inside IR35 is widespread.

“This is very concerning, as it could lead to many genuinely self-employed contractors being classed as employees for tax purposes,” she said.

“We recommend that IR35 decisions should be made on a case-by-case basis, but our members have been telling us that blanket assessments have been the common way in which public authorities have made these judgements.”

Andy Chamberlain, IPSE’s deputy director of policy, agreed the findings were “deeply concerning”.

“The preposterously high ratio raises serious questions about how the assessments have been made,” he said.

“In the NHS, the disastrous changes to IR35 caused chaos and drove many skilled contractors to leave. We could now see a similar situation here. And this is only a taste of things to come when these rule changes are extended to the much larger private sector next year.”

In 2018, ContractorCalculator conducted a test of CEST against the 24 historical employment status cases HMRC claimed were initially used to ascertain its accuracy. The firm claimed it returned a flawed outcome 42 per cent of the time.

Chaplin suggested the continuation of such practices would significantly drive up the cost of hiring contractors, while impeding crucial workforce flexibility.

“Our calculations show that, for firms that need to attract talent from further afield, the cost of engaging these individuals can increase by as much as 43 per cent, once travel and accommodation have been factored into the equation,” he said.

“As we approach Brexit, firms can’t afford to pay more money for the same resources. Now is not the right time to be introducing these new taxes on business.”

He added the fallout for contractors and hiring firms would be severe. “The injustice of such an approach to status assessments will prove a huge deterrent for would-be contractors, which will in turn diminish flexible access to key skills for firms unwilling to pay a premium,” he said.

An HMRC spokesperson said: “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.”