A tribunal judge has rejected HMRC’s online Check Employment Status for Tax (CEST) tool by ruling that a contracting professional was, according to case law, self-employed and not inside IR35 as the test had determined.

Crystal Umbrella reported that business analyst Tony Elbourn, who was contracted by the Met Office between August 2017 and January 2018 and appears to have been paid by recruitment firm Qualserve Consulting Ltd., was deemed at first by the CEST tool to be inside IR35 during his engagement. This led him to make a claim for unlawful tax and national insurance deductions from wages.

At the tribunal, the judge found Elbourn to be neither an employee, nor a worker, but self-employed, which meant that IR35 could not have applied to the engagement.

According to Contractor Calculator, in securing legal proof of his employment status Elbourn managed to prove that an estimated £9,500 was wrongly deducted from his income by the client and agency, who treated him as ‘employed for tax purposes’ under the Off-Payroll rules. As a result, the respondents are now obliged to repay the sum deducted.

ContractorCalculator CEO, Dave Chaplin commented, “This case marks a hammer blow for HMRC. CEST’s accuracy has once again been called into question, in a case where the contractor’s self-employed status was never in doubt.”

“Moreover, the case has presented thousands more contractors, who have been overtaxed due to Off-Payroll, with a straightforward means of recouping what is rightfully theirs,” Chaplin said.

“Bizarrely, in this case, even though the client had decided using CEST, that he was a “deemed employee”, they then put up a defence claiming that he was in fact self-employed,” Chaplin said. “Whatever the Judge decided Elbourn would effectively win. Either he would be found outside IR35, or be found to be an employee or worker, in which case the employers NI would have been an unlawful deduction.”

“Though HMRC continues to champion CEST’s accuracy, we now have the first of what I expect to be many cases where a Judge makes a status decision that contradicts CEST,” Chaplin said.

This follows news that the HMRC is also requesting the personal details of public sector contractors continuing to work outside of IR35 through their limited companies, according to a letter leaked to ContractorCalculator.

The case also comes as the HMRC is finalising plans to extend ‘Off-Payroll’ rules to the private sector as part of a crackdown on tax avoidance from private companies claiming self-employed status.