In 2017, I found myself in the exact same position that thousands of freelancers have been in since the changes to IR35 in the private sector in April 2021. My public sector client decided that following reforms to IR35, I would be taxed at source – like an employee.
While previously I oversaw my own tax, the changes to IR35 in the public sector in 2017 meant that my client was now in charge of determining my tax status. The issue for us contractors is that clients can sometimes get things wrong and when it comes to IR35 clients get it wrong on an industrial scale. Risk-averse public sector clients blanket assessed thousands of contractors as ‘inside’ IR35 – I was one of them.
In 2017, when these wretched rules affected the public sector only, there was no ability to formally challenge the decision. My options were to leave the project or continue working for the client, despite the unfair taxation. I chose the latter as I was committed to the project and I wanted to finish what I had started.
That being said, I didn’t take my client’s IR35 ruling lightly. Being a longstanding member of PCG and IPSE, I was fully confident that my client had made the wrong determination and I was determined to find some way to reclaim my hard-earned income.
My client wasn’t going to reverse the decision so my next step was to raise my concerns with HMRC. It is strange thing for a contractor to actively seek a conversation with HMRC about their IR35 status but these are strange times!
I was fortunate as I could lean on my wife’s legal expertise as a lawyer to support my case. Working together we attached a sixty-page letter to my annual tax return explaining why I had been unfairly overtaxed using longstanding legal precedents to defend my rebate request.
Then - silence. After 18 months of calling and emailing I was nowhere nearer to a resolution. Then one day I was told over the phone that HMRC had no evidence of my rebate request. To say I was disappointed would be an understatement. Whilst remonstrating to the official I was speaking to, the call was passed on to someone else at HMRC and things took a dramatic turn for the better. Out of the blue I was told that my request would be granted and that I would be paid back in full – would I prefer a tax credit or a cheque?
While I was obviously delighted to receive a £20,000 cheque weeks later, I shouldn’t have been in the situation in the first place. The money was mine to start off with and I was only able to reclaim it after countless hours chasing HMRC. It also shouldn’t have taken 18 months and since receiving the cheque I’ve started to question what processes HMRC went through. Had they assessed my client’s status determination processes? Had they reviewed my contract and the working practices? Could there be others that are due the same rebate but just don’t know it yet? Had the Employer’s National Insurance been returned to the fee payer?
For now, I don’t know the answers to these questions. However, what I do know is that thousands of freelancers have been in the exact same position as me – handed an IR35 status decision and being told to lump it.
To my fellow IPSE members with IR35 issues reading this story, I would tell them this – it is possible to reclaim the tax but it is not without risks. You will be drawing attention to yourself and your business. HMRC might take the opportunity to investigate your other engagements. That didn’t happen to me, yet, but that’s not to say it won’t happen to you.
If you are prepared to live with that risk, and you are reasonably certain you have overpaid tax, then you should consider claiming. You will probably need the support of an accountant and a very good lawyer (I’m lucky, my wife is one) and you will need patience. Clearly not every case will result in a payout but if I can do it others can too. While it might take 18 months or longer, my situation shows challenging a client’s IR35 decision via the tax return can work.
IPSE is investigating how contractors can challenge incorrect IR35 decisions via tax returns. We hope to update you soon.
Visit our IR35 News page to keep up with the latest updates, and you can find more support and useful information with our IR35 guide.
In this secret contractor blog, an anonymous IPSE member shares their experience of taking an inside IR35 role for the first time and debates whether it’s wort...
Having been a contractor for over a decade, the off-payroll (IR35) legislation in 2017 for the public sector and later for the private sector led to an avalanche ...
In this first Secret Contractor blog, an IPSE member describes their run-in with HMRC's Furlough probe.
