Most financial services practitioners will be aware of the off-payroll working rules, otherwise known as IR35.
The legislation is designed to identify individuals avoiding paying tax by supplying their services to clients via an intermediary, such as their own personal service company, when in fact they act and are being treated like an employee of the client.
In other words, the relationship in question is “employer/employee” as opposed to “independent contractor/client”.
As the next step in its crusade against personal service companies, HMRC has issued a consultation to extend the rules – under which public sector authorities are now responsible for deciding if IR35 applies to a person providing services through their own intermediary – to the private sector.
Prior to April last year, the responsibility for determining whether an individual should be treated as an employee or self-employed for tax purposes lay with that person, not the “engager”. The government recently claimed this shift in responsibility has raised £410m in revenue for it.
If the public authority decides IR35 applies to a worker, the person responsible for paying the worker’s intermediary must deduct tax and Class 1 National Insurance contributions and report them to HMRC.
HMRC advises public sector bodies to use its Check Employed Status for Tax tool to reach a conclusion and says it will stand by the results provided they are based on accurate information being entered in the first place.
However, concerns have been raised. In a letter to the Treasury, the Institute of Chartered Accountants in England and Wales has stated the CEST tool is not suitable for use in the private sector.
It says: “HMRC has stated that CEST does not cover all scenarios, including the mutuality of obligations master and servant test, and that the tool was designed based on public sector contracts. Further, there are also no rights of appeal for individual workers who disagree with the CEST status decision.”
Strong words indeed. There was also a challenge to HMRC on the reliability of CEST in a recent Public Accounts Committee meeting.
In opposition to that view, HMRC said: “[The CEST] is ultimately a guide and there is further, more detailed guidance people can turn to if it doesn’t help them. But we believe that, in 85 per cent of cases, it gives a response the engager can use and that we stand by.
“In the further 15 per cent of cases, they do have to either look at further guidance or get assistance from us to arrive at their decision. While we continue to work on the CEST and improve it, we think it is a perfectly good tool and it supports IR35 compliance.”
As the next step in its crusade against personal service companies, HMRC has issued a consultation to extend IR35 rules
That said, HMRC also confirmed there is no difference in tax law as to when CEST is applied, and it can go back and look at people’s records, reopen them and conduct a tax investigation on anyone over seven years.
The PAC chair highlighted this as another point of concern: “People are worried that they will have gone through the CEST process and calculated the tax they owe, but you could then go back and investigate and say it did not apply to them. Are you saying that is not the case for the 85 per cent who get that first resolution having gone through your calculator? Are you saying that is accurate?”
HMRC again emphasised the point that if people use its tool correctly and put the correct data into it, it will abide by the result it gives. It added that it assesses whether a public authority has put the correct data into the tool through its employer compliance checks.
It said: “Last year, public sector engagers were required to make their own determinations of whether the companies they were contracting with were caught by IR35. They use the CEST tool to do that. We can come along later and audit their compliance with their employer obligations, including the obligation to administer IR35 and deduct tax, and we will check whether they have used the tool correctly and made the correct assessments.
“For example, in some organisations, the contract says certain things but other things happen in practice, so the contract does not reflect the real nature of the relationship between the engager and the worker. In those circumstances, we expect them to use the reality. That is the kind of thing we would check.
“But IR35 has existed since 2000 and people have been obliged since then to apply it correctly. So there is no guarantee we would not go back into earlier years if people had not been applying it correctly.”
HMRC’s reiteration that it will stand by the tool’s results could backfire. If it supported all CEST determinations, it could be forced through long and expensive processes to check the answers were correct and stood up against case law.
However, public authorities are not obliged to use the tool and, if they do, they are not obliged to follow its results.
Interestingly, it seems some public authorities may be deducting incorrect amounts of tax and NI from contractors and may also be deducting employers’ secondary Class 1 NI from the contractors’ invoices, which is incorrect under the Social Security Contributions (Intermediaries) Regulations (SI 2000/727).
Reported problems appear to be working in HMRC’s favour, potentially resulting in higher tax and NI revenues
The reason for this could be a widespread mistrust of the tool’s results and a fear of subsequent HMRC audits resulting in costly investigations. Or they may simply be deciding not to use the tool because it would take up too much time and effort to assess every worker individually. It could be easier to apply a blanket IR35 or even employment status to all workers instead.
It remains to be seen if HMRC will try to extend the off-payroll working rules to workers in the private sector. But the consultation gives some indication of the seriousness of the subject to it.
No route to appeal
So far, reported problems with CEST appear to be working in HMRC’s favour, potentially resulting in higher tax and NI revenues for the government than would otherwise have been the case.
Worryingly, there is currently no route for a contractor to appeal a ruling on an IR35 decision made by its public sector client, so the only way could be to mount a legal challenge for misrepresentation or alternatively challenge their treatment at an employment Tribunal.
But the fact that topics as complex as this have been subject to scrutiny in PAC hearings may provide some crumbs of comfort to contractors hoping HMRC could be persuaded to rethink any further reforms to IR35.
You may have heard the news concerning BBC presenters caught by IR35. The corporation confirmed in its PAC hearing that it is helping around 15 individuals facing HMRC bills with temporary cashflow loans and advances. It has also set up an internal, independent process, under the supervision of the Centre for Effective Dispute Resolution, for others seeking help with HMRC demands.
The contractor market is a significant and growing one, so while financial planners are probably not so deeply involved in running the tax affairs of these individuals, having an awareness of significant tax change that could affect them is important in the context of a professional relationship.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn