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New IR35 case raises serious questions about CEST, off-payroll roll-out

Another day, another court battle rooted in IR35. This is the case of Mr Elbourn v the Met Office and Qualserve Consulting Ltd. It provides further proof, if it were needed, that the changes to the way IR35 works in the public sector, brought in last year, have caused major problems and distortions around employment status. There are still some details which are unclear about this case, but I will do my best to set out what we know and provide a little commentary.

Elbourn’s limited company was engaged to work at the Met Office between August 2017 and January 2018. Qualserve was the agency in the chain. It appears that IR35 was deemed to apply to the engagement.

At the end of the engagement, Elbourn made a claim for unlawful deductions from wages. We think these deductions were for Employers’ National Insurance (NI) and this is where the case gets interesting. 

In the public sector, clients (public sector organisations) have to determine whether IR35 should apply. If they determine it does apply, tax must be deducted at source, as it would for an employee. So the contractor has to pay P.A.Y.E and Employees’ NI. It’s up to whoever pays the contractor to ensure the deductions have been made – in this case, and many others, that’s an agency. 

The agency, for tax purposes, therefore assumes the role of ‘employer’ and is liable for Employers’ NI. However, because agencies are unable or unwilling to meet that cost, they often deduct the equivalent amount from the payments to the contractor. This leaves the contractor effectively paying both the employer and the employee NI. IPSE has long argued this is completely unfair. If the contractor has now been deemed ‘employed for tax purposes’ (to use the government parlance), surely it follows that the client, or agency should be deemed the employer, and handle their tax liabilities appropriately.

The other noteworthy aspect to the case is that the infamous and much maligned CEST tool was used to assess the engagement. CEST asks a series of questions and, in most cases, generates an IR35 ruling. In this case, we have to assume it decided IR35 should apply (although we do not know that for sure). That is important because the tribunal found Elbourn was self-employed, seemingly countering the CEST determination.

IPSE, and many others have long argued that CEST is not-fit-purpose. It ignores critical parts of case law and it churns out incorrect assessments of status. It’s deeply flawed and we have always felt that it’s only a matter of time before a judge disagrees with a CEST determination. This might be that moment, but we are still trying to clarify whether CEST was central to the IR35 determination in this case and what it decided.

Because the judge decided Elbourn was self-employed, his claim for unlawful deductions failed, but the judgment leaves behind a glaring question: if the tribunal, having considered the working practices of an engagement, decides that it was one of self-employment, why was it ever inside IR35 in the first place? There are those who will say that tax status and employment status are separate, and they would be right – technically it’s possible that Mr Elbourn could be employed for tax, and self-employed for employment status – but it’s very hard to argue how that can be logically consistent, especially when the tests for both tax and employment status are essentially the same.

And if we’re saying it shouldn’t have been inside IR35, what can Mr Elbourn do now to reclaim both the tax he has paid directly as a ‘deemed’ employee, and the deductions taken by the agency in order to pay the Employers NI?

Last month IPSE supported Susan Winchester with a claim over holiday pay. Although the two cases are entirely separate, there is one glaring similarity: both cases would not have happened without last year’s IR35 changes in the public sector. Those changes require large organisations to look in detail at an engagement, decide that it is basically an employment, but then not employ the individual, just ensure that some entity in the supply chain taxes them as if they are employed. At the very least, that is muddying the already very muddy waters of employment status; at worst it is a mechanism which can be used to deny people the employment rights they are entitled to.

It’s unfathomable that the government is considering extending these rules to the private sector, though that is exactly what is happening. If they do extend them, you can expect to see many more cases such as these. The government should stop and address the issues this case raises before it even considers widening the scope of this mess.

In the meantime, we certainly hope Mr Elbourn continues to challenge the inherent unfairness of his situation. Contractors everywhere will be watching with great interest. 

Meet the author

Andy Chamberlain

Director of Policy and External Affairs