The new ‘off-payroll’ rules ‘ commonly known as the ‘IR35 rules’ from the original Inland Revenue press release that first announced their existence ‘ have in some ways arrived in the wrapping of HMRC’s Check Employment Status for Tax tool. The tool allows hirers, agencies and contractors who work through limited companies, partnerships, or unincorporated associations to check whether the IR35 rules apply.
The reforms only apply to companies that do not qualify as ‘small’ within the meaning of sections 382 and 383 of the Companies Act. A company is ‘small’ when two of the following requirements are satisfied: the company must have a turnover of not more than £10.2m, a balance sheet total of not more than £5.1m, or not more than fifty employees. In all cases where at least two of these conditions are not satisfied, the business in question will be subject to the new IR35 rules.
The new rules shift tax compliance responsibility from contractor to end-client. This is, in many ways, a remarkable displacement of potential liability. End clients now have the daunting task of issuing so-called ‘status determination assessments’ to their contractors, which must determine whether or not they are genuinely self-employed under the contractual arrangements in question. While HMRC have said they will stand by the results of the CEST tool, there are legitimate questions as to the efficacy of a tool that, in many cases, is simply unable to make a relevant determination.
As Nick Gilbey, Chief Technology Officer at Wolf IR35 Legal Services observes:
Our team has undertaken a lengthy structural and technological analysis of CEST, a process that has generated over 50,000 PDFs and more than 17GB of data. We have been surprised by the number times that CEST gives ‘Unable to make a determination’ as a result. This can and does occur even where Counsel has formulated answers that would typically place a contractor inside the off-payroll rules.
Another immediate challenge is the fact that for businesses who use multiple contractors simultaneously, the CEST tool does not allow for structured and holistic assessments across the business. Status assessments must be undertaken on a contractor by contractor basis ‘ that is the nature or IR35 ‘ but there nevertheless ways to do so that facilitate an administrative and technological economy of scale. Amidst an economy that suffered a near 10% drop in GDP in 2020, the reality is that business needs the flexible resource of self-employed contractors more than ever.
One misconceived approach that some have taken is to undertake so-called ‘roles-based’ assessments. This concept has no real basis in law, as it is not roles as such that must be assessed. The core question is whether, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client. In practical terms, this requires a multi-factorial approach that CEST’s room-by-room based diagrammatic process can have some difficulty processing.
There are several alternatives businesses can take. It is important that they consult with experts at a preliminary stage. Determining the extent to which the business relies upon, and can further benefit from, utilising self-employed contractors is necessary to chart a path ahead. Planning ahead is also vital – businesses should forecast contractual arrangements and likely contractor numbers for both Q2 and
Q3 of 2021. This will allow forward planning and ensure that the business has all the support it needs to progress. On the whole, businesses should favour and seek solutions that allow holistic and time-saving approaches rather than seeking to handle the new rules in a piecemeal way.
The final point naturally concerns the provision of insurance. CEST does not provide any safety net should HMRC take the view that, in fact, the answers that were provided were incorrect and that, as a consequence of the contractor being inside IR35, the PAYE and NI liabilities are due from the end client. The private sector companies giving IR35 advice, the best of which, will provide an underwritten product that insures against the legal costs of any such risk. It is hoped that this will give end-clients peace of mind as they are guided through the new regulatory landscape.
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