Don’t Get Bitten By HMRC’s IR35 Changes

The private sector IR35 reforms are set to go live in April 2021, following the MP’s recent approval of amendments to the Finance Bill. Until then, the intermediary (the contractor’s limited company) remains responsible for determining the employment status of its workers.

HMRC launched their Check Employment Status for Tax (CEST) tool in 2017 to support the public sector roll out of the off-payroll working rules and this has been subject to several updates since the launch, mainly in view of the private sector rules that were due to be introduced from April 2020 (but subsequently delayed due to the -19 situation).

The CEST tool sets out a series of questions to assist the making an assessment of whether a particular engagement is one of employment or of self-employment.

The new IR35 legislation requires the end client using the labour of a worker to take “reasonable care” in making their employment status determinations. Many businesses will be using CEST as a key part of their approach.

HMRC state that they “will stand by the result you get from this tool”, unless “the information you have provided was checked and found to be inaccurate” or in the case of “contrived arrangements, designed to get a particular outcome from the service.”

The main concern with the existing CEST tool is that it does not take ‘mutuality of obligation’ into account, which is one of the fundamental tests to consider when determining employment status.

Briefly, to meet this test only the basic requirements of mutuality of obligation are necessary, for example:

• that the engager must be obliged to pay a wage or other remuneration; and
• that the worker must be obliged to provide their own work or skill.

If these two requirements are not met, then this is a clear indication of a contractor-client relationship.

It is interesting to note that two IR35 appeals won by the taxpayer late last year – CANAL STREET PRODUCTIONS LIMITED v HMRC and RALD CONSULTING LIMITED v HMRC – was due to the lack of obligation from either party to produce or provide work.

The concern, however, is that more and more businesses who will be required to assess the status of contractors from 6 April 2021 may find themselves relying on HMRC’s CEST tool which will not necessarily produce an accurate result.

As CEST is an automated system, it may well miss key nuances which in turn could produce the wrong result and have a detrimental effect on the intermediary.

How can we help?

It is crucial that you understand your IR35 position with every engagement you enter into and particularly in view of the new rules coming into force from 6 April 2021. Our wide experience of the intermediaries’ legislation, employment status and associated HMRC enquiries means we can help you with your IR35 contract review.

Debbie Dolega is a Chartered Tax Adviser with over a decade’s experience in top tier accountancy firms as a personal tax specialist. Please contact her on debbie.dolega@sgllp.co.uk or 020 7291 5648.