Sole trader’s ‘inside IR35’ label sparks £21,000 SEISS tax bill

How IR35 can turn covid income support into ‘huge’ tax debt, made worse by lack of process and HMRC’s failure to answer phone calls. 

The absence of a statutory challenge for sole traders with clients who think IR35 isn’t off limits, and so deduct ‘inside IR35’ taxes, has been laid bare. 

In a “soul-destroying” case that Kingsbridge has now spoken about to HMRC and advisers helping the taxpayer pro bono, a freelance physician faced a tax bill of £21,000. 

‘Inside IR35 Status Determination Statement’ 

Had the freelancer, Jo Livingstone, been a limited company, an ‘inside IR35’ status determination statement (SDS) made about her by an NHS trust could have been fought with legislative backing. In fact, Livingstone could have used the Client-led Dispute Process (CDP), at Chapter 10 ITEPA, observes ReLegal Consulting, which is assisting her free of charge. 

While the physician did object to the ‘inside IR35’ decision, “technically” she was not entitled to challenge it whatsoever, says ReLegal’s founder Rebecca Seeley Harris. 

The absence of a statutory challenge process for ‘inside-IR35’ sole traders follows on from IR35, technically, not applying to sole traders in the first place. 

‘No intermediary = no Intermediaries Legislation (IR35) in play’ 

As Ryan Dawson of Kingsbridge nicely puts it: “If there’s no intermediary i.e. no limited company – then the Intermediaries Legislation cannot be in play.” 

But this fact didn’t help Livingstone after it was clearly lost on the NHS trust that deemed her ‘inside IR35’, leaving her powerless to contest the determination. 

ReLegal’s Ms Seeley Harris isn’t impressed at what may be a legislative oversight – but a very costly one for the taxpayer. 

‘Taxpayers deserve clear pathway to challenge status decision’ 

“The taxpayer should have a clear pathway to be able to challenge their status,” the tax lawyer told Kingsbridge. 

“If labelled ‘inside IR35’ there is a pathway but not if you’re self-employed, as the CDP applies only to those providing services via a limited company.” 

Kingsbridge understands that the NHS trust did informally apply the CDP, but still decided Livingstone was ‘inside IR35’, triggering employment tax deductions.  

‘Notifying HMRC of a continued dispute with your deemed employment status’ 

Yesterday, HMRC confirmed that processes are in place if an individual disputes the employment status which has been decided by their engager. 

The Revenue advises such individuals to read “Notifying HMRC of a continued dispute with your deemed employment status” in the Employment Status Manual (ESM). 

But as Kingsbridge’s IR35 Project Manager points out, the guidance says the first port of call is Chapter 10’s CDP – yet sole traders aren’t entitled to a CDP. 

‘Livingstone got labelled inside IR35 by NHS trust’ 

“Jo Livingstone’s problems are likely down to an administrative error with her client, which was an NHS trust,” begins Mr Dawson. 

“She was treated by the NHS trust as self-employed, but somewhere along the way got labelled by them…as ‘inside IR35.’  

“The trust likely wanted to convey that she was employed for tax purposes. That’s despite her reportedly saying she had self-employed working practices.” 

Yet Livingstone’s “problems” actually started earlier. In fact, she discovered the ‘inside IR35’ label after SEISS grants she received during lockdown were recalled in 2022, in the shape of a £15,000 tax bill. That’s because the trust deeming her employed for tax purposes was used by HMRC to recall her three, £5k Self-Employed Income Support Scheme (SEISS) grants. 

‘NHS trust made technically incorrect statement to HMRC’   

Egos Ltd, a legal advisory specialising in freelance and contract law, yesterday laid it all out for Kingsbridge.  

“The NHS trust for which Livingstone had worked as a self-employed freelancer appears to have told HMRC – presumably in response to a question from HMRC – that their records showed she was ‘inside IR35.’ 

“Clearly, such a statement would have been incorrect, in relation to a self-employed freelancer. 

“One would have hoped that, having taken the trouble to ask the NHS trust and get a reply from them, HMRC would then have dealt with the matter appropriately.”  

‘HMRC chose deluge of penalties and interest instead of appropriate responses’ 

To Egos’ boss, Roger Sinclair, “appropriately” would have constituted one or two things. 

HMRC should have checked her tax records to see if the self-employed status she claimed when applying for the SEISS was borne out by those records. 

Or second, HMRC could have just contacted Livingstone to seek clarification. 

“Rather than either of those appropriate responses,” says Mr Sinclair, “HMRC just issued a demand for repayment, with a deluge of penalties and interest. 

‘Soul-destroying, with sleepless nights worrying about going to prison’ 

Sinclair was referring to Livingstone’s £15,000 tax bill, reportedly arriving with hundreds of pounds in penalties and interest already added on top. 

The Sunday Times also reported that the bill soon rose to £21,000, resulting in the taxpayer suffering “sleepless nights worrying about going to prison.” 

Livingstone described the ordeal as “soul-destroying,” not least because HMRC staff couldn’t help over the phone, and no replies to her letters were received. 

The taxpayer says she must have written to the Revenue five times, called more than 50 times, and spent hours looking on HMRC’s website for answers. 

‘Jo Livingstone got hit three times as a taxpayer’ 

Kingsbridge’s Mr Dawson says: “Hit first with ‘inside IR35’ even as a sole trader, then hit by a big tax bill, Livingstone was hit a third time by joining ‘the 44,000’. 

“These are the nearly 44,000 telephone customers that MPs have found were cut off by HMRC after waiting an age, 70 minutes, to speak to a HMRC officer. 

“While these figures [for the 11 months of 2023/24] from the Public Accounts Committee also show HMRC met its answering target in Q4 2024, telephoning HMRC can be grim. 

“And for Livingstone, the experience was awful in the extreme. All taxpayers, despite being called ‘customers’ by HMRC, deserve far, far better than what she experienced.” 

‘Three-year battle for Livingstone, culminating in FTT decision’ 

Kingsbridge understands that, despite no judgment being publicly available, Livingstone eventually had to take HMRC to the First-tier Tribunal. 

She succeeded in getting both the interest and penalties thrown out, although the judge was not asked to rule on her employment status. 

As well as help from advisers agreeing to support her on a pro bono basis, Livingstone also worked with the Revenue’s dispute resolution team. 

“In the end, it took this self-employed individual three years to get the entire tax debt cancelled,” says Mr Dawson, reflecting on press reports. 

“This issue might have been resolved easily and with less emotional toll on the taxpayer if she could have just got through to a correctly trained HMRC official early on.” 

‘Sole traders’ recourse if deemed employed is via self-assessment’ 

As to ‘resolution’ now for sole traders disagreeing with being deemed employed for tax purposes, HMRC’s ESM guidance states that their recourse is via self-assessment. 

“Jo Livingstone’s recourse is to reclaim the tax through self-assessment,” ReLegal’s Seeley Harris told Kingsbridge, adding last night: 

“Although there are various hoops that you have to jump through, the main point here is that HMRC needs to respond, in order for it to be acknowledged. 

“Even if you’re a limited company contractor, once the client has responded [within 45 days] to the CDP under Chapter 10, or refused to change their assessment, that is the end of the end user’s statutory obligation.   

“At this stage, the contractor has tax deducted on an ‘inside IR35’ basis. Therefore, their route, too, is to challenge by appealing to HMRC to reclaim the tax paid.” 

‘Inside IR35 contractors face HMRC bottleneck trying to reclaim tax’   

The author of CEST Explained, Seeley Harris continued:   

“But in Livingstone’s case, she got stuck – because nobody at HMRC responded [although I understand the matter is now being dealt with].  

“However, contractors and freelancers ought to be aware, there is a bottleneck in being able to try and reclaim your tax paid under ‘inside IR35’.” 

‘Significant difficulties getting hold of HMRC despite £50m investment’ 

Gareth Wilcox, partner at Opus Business Advisory Group, told Kingsbridge: “Unfortunately, there can be significant difficulties for taxpayers getting hold of HMRC. 

“And this frustrating experience is despite recent government promises about supporting HMRC, including with £50m in extra resources being poured in. 

“For its part, HMRC often reminds us that we have a ‘self-assessment’ regime and that it is the responsibility of the taxpayer to get things right. 

“But we hear so often of errors being made by HMRC, which take months – or in Jo Livingstone’s case – years to correct.” 

‘Breathing Space debt respite scheme’ 

Wilcox says taxpayers should make themselves aware of their rights if a tax issue or dispute arises and then look at consulting an expert without delay. 

“There are professionals out there who can support taxpayers, including in seeking redress from HMRC where errors have been made,” he says.  

“Where funds are limited and pressure is mounting, there are also self-help options available, such as the ‘Breathing Space’ debt respite scheme. But one thing I would never advise is either ignoring an issue or suffering in silence.” 

‘Inside IR35 label converted covid income support into huge tax debt’ 

Livingstone didn’t do any of Wilcox’s ‘no-nos,’ but she still suffered. 

A sympathetic Mr Dawson said: “An ‘inside IR35’ determination converted vital income support she received as a sole trader during lockdown into a huge tax debt, in an aggressive move by HMRC. 

“After trying to resolve the matter herself, Livingstone seemingly had no choice but to take HMRC to court, where she eventually worked with HMRC’s ADR team.” 

‘Average call waiting time to speak to HMRC of 23 minutes’  

The IR35 Project Manager added: “I appreciate that HMRC might be working hard to reduce call waiting times, but the numbers really aren’t great.  

“HMRC’s own figures tell us that the average helpline wait time has rocketed to 23 minutes in 2023-24, up from just 4 minutes in 2018-19.  

“Taxpayers deserve better. And HMRC should strive to provide a much better experience for ‘customers’. It’s not helped by the tax code being so wildly complicated.” 

How Kingsbridge can help 

Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. At Kingsbridge we offer tailored support, including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Our team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape. 

We also offer a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability. 

To find out more, get a quote or contact us today.